European stocks surge to 28-month high

The euro rose sharply against the dollar on Tuesday on sovereign fund buying and a surge in German investor sentiment, while European stocks hit a 28-month high on optimism about strengthening a euro zone rescue fund.

The euro rose more than 1 percent against the dollar after the ZEW think tank in Germany said about 50 percent of investors now expect the European Central Bank will have to raise interest rates within the next six months. For details see:

ZEW’s monthly index jumped in December to its highest level since July.

The euro rose as high as $1.3467 on trading platform EBS and was last trading up 0.80 percent at $1.3396 .

European shares hit their highest close in more than 28 months as euro zone finance ministers moved closer to improving a rescue fund and investor confidence grew in Germany’s economy, Europe’s largest.

The FTSEurofirst 300 <.FTEU3> index of top European shares ended 0.9 percent higher at 1,167.59 points. Spanish banks were among gainers, with Banco Santander up 4.1 percent and BBVA 5.4 percent higher.

European finance ministers moved towards beefing up the euro zone’s rescue fund and preparing new stress tests for the region’s shaky banks.

“Clearly the fact that finance ministers are meeting and heads of state are going to meet in March indicates that they are taking the (euro zone debt) problem more seriously than three months ago,” said Richard Batty, strategist at Standard Life Investments in Edinburgh.

“There is some movement towards a resolution, though it is a very long process. The market is giving some form of benefit of the doubt to that process.”

The Dow industrials rose and other Wall Street indices were little changed after disappointing Citigroup results weighed on financial stocks and Apple Chief Executive Steve Jobs took a medical leave of absence.

The Dow Jones industrial average <.DJI> was up 58.01 points, or 0.49 percent, at 11,845.39. The Standard & Poor’s 500 Index <.SPX> was down 0.44 point, or 0.03 percent, at 1,292.80. The Nasdaq Composite Index <.IXIC> was up 0.08 point at 2,755.38.

World stocks as measured by MSCI <.MIWD00000PUS> advanced 0.49 percent, with the emerging markets index <.MSCIEF> gaining 0.44 percent.

The dollar was down against a basket of major currencies, with the US Dollar Index <.DXY> off 0.36 percent at 79.052. Against the Japanese yen, the dollar was up 0.05 percent at 82.76.

Oil fell 0.11 percent to $91.44 per barrel after the International Energy Agency said members of the Organization of Petroleum Exporting Countries had been quietly raising output and the oil producing group insisted the market was amply supplied.

Deliveries through a key North American supply route, the Trans-Alaskan pipeline, commenced.

US government bonds fell after a large sale of long-dated debt.

The benchmark 10-year US Treasury note was down 13/32, with the yield at 3.3817 percent. The 2-year US Treasury note was down 1/32, with the yield at 0.5967 percent. The 30-year US Treasury bond was down 24/32, with the yield at 4.582 percent.

Gold rose for a second day, drawing strength from a weaker dollar and demand from key Asian consumers.

Spot gold prices rose to $1,364.80 an ounce.

Copper rose as the dollar fell and European equities surged on signs of improving economic growth, which suggests better prospects for industrial metals demand.

Overnight in Asia, Japan’s Nikkei <.N225> closed up 0.15 percent, while MSCI’s index for Asian shares outside of Japan <.MIAPJ0000PUS> rose 0.6 percent.