Asian shares rose on Wednesday and the euro clung to most of the previous session's gains as investors bet that Europe's worsening debt crisis and faltering global growth will prompt major central banks to launch a new round of monetary stimulus.
The Federal Reserve concludes a two-day policy meeting later, with expectations high that the U.S. central bank will extend its bond-buying program dubbed "Operation Twist".
"We have seen a clear weakening in the U.S. economy," said Ric Spooner, chief market analyst at CMC Markets in Sydney.
"The strong employment numbers we'd seen earlier look to have been seasonal, so (the Fed) is going to have to look at doing something to improve jobs growth. The question is: will they act now or hold off and use their firepower if or when the euro crisis gets worse?"
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.5 percent and Japan's Nikkei share average <.N225> climbed 1.2 percent, though European and U.S. markets were expected to ease a touch from Tuesday's gains. <.T>
The liquidity hit provided by previous doses of Fed stimulus has lifted riskier assets, and financial markets have become highly sensitive to expectations of further moves, with global equities and commodities tending to rise and the dollar coming under pressure when action is seen as increasingly likely.
U.S. stocks rose around 1 percent on Tuesday, European equities advanced 1.6 percent <.FTEU3> to a one-month high and Britain's FTSE 100 <.FTSE> rose 1.7 percent to a six-week high. Industrial metals and the euro also gained ground. <.N> <.EU> <.L>
Spreadbetters called the main European indexes to open down 0.1-0.3 percent on Wednesday and S&P index futures traded down 0.1 percent, pointing to a slightly weaker start on Wall Street.
"It's almost a sure thing that if the Fed fails to deliver to expectations, markets will quickly unwind yesterday's gains, which were premised almost solely on anticipated Fed action," said Cameron Peacock, an analyst at IG Markets in Melbourne.
U.S. employment, manufacturing and housing data has in recent weeks suggested the recovery in the world's biggest economy is faltering, increasing the chances of action from the Fed, whose policy decision is due at 1630 GMT.
The market consensus was that further quantitative easing or "QE3" - effectively creating money to purchase assets - was unlikely for now, but that an extension of Operation Twist, aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones, was on the cards.
"There is some, perhaps in our view, misplaced hope for QE3 today," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. "We believe the Fed will probably extend its Operation Twist, but think QE3 seems unlikely at this stage."
The euro eased a fraction on Wednesday to trade around $1.2677, after rallying nearly 1 percent in the previous session.
Copper also fell, losing about 0.3 percent to fetch around $7,585 a tonne, but oil edged up, with Brent crude gaining 0.2 percent to just below $96 a barrel.
Gold, which tends to be pushed higher by monetary stimulus due to its traditional role as a hedge against inflation, rose around 0.2 percent to about $1,620 an ounce.
Although most attention was focused on the Fed, a surprise fall in British inflation strengthened the chance of steps from the Bank of England to support its economy as it feels the heat of the euro zone's problems.
The relief in financial markets at the slim victory for pro-bailout parties in Greece's weekend election has quickly ebbed, with attention switching from fears that Athens could be forced out of the euro zone to the broader concern that contagion from the debt crisis is spreading to Spain and Italy.
Spain lurched closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt on Tuesday.
European authorities have already agreed to a 100 billion euro rescue for Spain's troubled banks, and a rise in the yield on its 10-year bonds above 7 percent have heightened concerns that the euro zone's fourth largest economy could be driven to seek a full-blown bailout.
"The yield on 10-year government bonds in Spain edged a little lower on Tuesday, but the broader trend upwards over the prior 10 days or so underlines the fact that the banking bailout will not address the country's broader fiscal problems," said Jonathan Loynes, chief Europe economist at Capital Economics, in a note.
"A sovereign bail-out is all but inevitable."
Asian companies are increasingly feeling the global chill.
The region's top firms are less upbeat on their business outlook than in the first quarter, with mounting concern over the euro zone crisis and a slowdown in China's growth, according to the latest Thomson Reuters/INSEAD Asia Business Sentiment Survey, published on Wednesday.
Asked what was the biggest risk factor they face, 111 of the 177 companies polled said global economic uncertainty, and 28 cited rising costs.
(Additional reporting by Luke Pachymuthu and Masayuki Kitano; Editing by Nick Macfie)