* Dollar at 2-mth vs euro, 10-wk low on index as FOMC meets
* World stocks push higher; helped by Obama speech and Fed
* US/Euro 3-mth futures show euro premium well over 1 pct pt
By Mike Dolan
LONDON, Jan 26 (Reuters) - World stocks rose and the dollar
hit a two-month low against the euro on Tuesday after a promise
of spending cuts from U.S. President Barack Obama cemented
expectations the Fed will retain faith in its ultra-loose
policy.
Obama's annual State of the Union speech late on Tuesday
also signalled corporate tax cuts, a day before the U.S. central
bank's latest policy decision, due at 1915 GMT.
Signs of Washington getting some grip on its bloated budget
deficits, even at the margin, will reinforce speculation of no
change to the monetary policy stance this year.
By helping keep the Fed interest rate horizon and long-term
U.S. interest rates low, tighter fiscal policy tends to weaken
the dollar -- especially against a euro buoyed by the European
Central Bank's increasing hawkishness on inflation.
Betting on easy U.S. money persisting and the prospect of
balancing those budget cuts with corporate tax breaks added a
fillip to U.S. and global equity prices.
"Obama's comments seems to have lifted sentiment and helped
calm some nerves. It was a very bullish speech and we can expect
to see more of the same from the Fed," said David Jones, chief
market strategist at IG Index.
Some economists said that an outcome that avoided either
overkill on austerity or a fresh spending spree was probably the
best for the market and, taken in isolation, the Fed outlook
should prove positive.
"The stock market should be fine with the spending freeze,"
said Christopher Low, chief economist at FTN Financial in New
York. "People don't want additional stimulus here. This will
allow investors to focus on the Fed."
Most analysts saw the Fed keeping policy loose.
"We expect the Fed to maintain its commitment to asset
purchases up to the end of the second quarter and keep its
"extended period" language despite a more upbeat view of the
U.S. economy," said Nick Stamenkovic, RIA Capital rate
strategist.
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Graphics of markets: http://link.reuters.com/rem45n
U.S. Fed begins two-day meeting []
Obama's State of the Union speech []
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TRANSATLANTIC CONTRAST
Ten-year Treasury bond yields <US10YT=RR> lost more than
five basis points on Tuesday but recouped some of that since
Wednesday.
Interest rate futures markets, however, showed the 3-month
yield premium expected on euro deposits over dollars at the end
of 2011 rising above one percentage point to a new cycle high.
The dollar fell to a 10-week low against a basket of world
currencies <.DXY> and to a two-month low of $1.3723 to the euro.
Equity markets were buoyant. Europe's FTSEurofirst 300
<> jumped 1.0 percent, and world stocks measured by MSCI
All-Country World Index <.MIWD00000PUS> climbed 0.42 percent.
U.S. stock index futures <SPc1> <DJc1> <NDc1> were up about
0.4 percent, indicating a stronger opening on Wall Street after
a flat session on Tuesday.
Earlier, Japan's Nikkei average <> fell 0.5 percent,
giving back some of the previous day's 1 percent rally. But
other Asian markets ticked up slightly and MSCI's index of Asian
stocks outside Japan <.MIAPJ00000PUS> rose 0.1 percent.
Emerging Asian markets rose powerfully in 2010, but since
then some investors have taken profits, and some pulled money
out of economies they fear are the most vulnerable to the
harmful effects of inflation, a growing global concern.
"Worries over monetary tightening will persist in the long
term, weighing especially on shares of producers dependent on
raw materials as their prices are still near all-time highs,"
said Masayuki Otani, chief analyst at Securities Japan Inc.
In Europe, energy stocks featured among the best performers,
with the STOXX Europe 600 Oil & Gas index <.SXEP> up 1.2
percent. BG Group gained 3.1 percent after a new discovery
confirmed light oil in the Carioca area, offshore Brazil.
Crude oil futures <CLc1> were up 0.8 percent in early trade.
European shares were also helped by strength in carmakers on
merger and acquisition hopes. The STOXX Europe 600 Automobiles &
Parts index <. SXAP> rose 2 percent.
Porsche <PSHG_p.DE> climbed 4.4 percent after a senior
family member said its merger with Volkswagen <VOWG_p.DE> was on
the right track []. Volkswagen rose 2.9 percent
(Additional reporting by Daniel Magnowski in Singapore,
Harpreet Bhal, Joanne Frearson and Kirsten Donovan in London;
Editing by John Stonestreet/Ruth Pitchford)
