By Wanfeng Zhou
NEW YORK (Reuters) - Global stocks rallied to 3-1/2-month highs on Tuesday and the euro hit a seven-week peak against the U.S. dollar on hopes the European Central Bank will soon start buying Spanish and Italian bonds to contain the debt crisis.
Spanish borrowing costs fell and Portuguese government bond yields hit levels seen before it agreed on a bailout deal, with traders citing a media story over the weekend that the ECB was drawing up detailed plans about bond-buying.
U.S. stocks opened higher, with the S&P 500 index hitting a four-year high as equity markets continue to grind steadily higher on hopes that central banks will act in the near future to stimulate their economies.
"I am looking for new highs in the major indexes," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. "Overall there is no one major negative that's out there right now that people are scared of."
The MSCI global share index <.MIWD00000PUS> rose 0.6 percent to 327.29. European shares <.FTEU3> advanced 0.1 percent.
On Wall Street, the Dow Jones industrial average <.DJI> was up 20.85 points, or 0.16 percent, at 13,292.49. The Standard & Poor's 500 Index <.SPX> was up 4.33 points, or 0.31 percent, at 1,422.46. The Nasdaq Composite Index <.IXIC> was up 13.12 points, or 0.43 percent, at 3,089.33.
Yields at a Spanish short-term debt auction dived on Tuesday, while Europe's volatility index VSTOXX <.V2TX> hit a one-month low, signaling a steady rise in investors' appetite for risk.
The ECB sought to quell speculation that it was considering capping inflamed borrowing costs by buying those countries' bonds if they breached a certain level. Nevertheless hopes for the plans remain high.
Financial markets have also enjoyed a red-hot run over the last few weeks on hopes that the new urgency in Europe to overcome its 2-1/2-year debt crisis may allow Greece to remain in the euro and keep the 17-member bloc from unraveling.
Greek Prime Minister Antonis Samaras will meet German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker in the coming days to try to secure more funding from the European Union, International Monetary Fund and ECB, even though Greece has fallen behind on its debt-cut targets.
The euro rallied 1 percent to $1.2464, while the dollar slipped 0.1 percent to 79.33 yen.
"The dollar is weaker versus the euro ahead of the key meetings this week that may provide clarity on both the immediate outlook for Greece and the outlook in regard to the ECB's plan to buy sovereign bonds," said Derek Halpenny of Bank of Tokyo Mitsubishi. "That optimism is persisting today."
Brent crude oil rose $1.33 at $115.03 a barrel, and has jumped from below $90 at the end of June, propelled by maintenance in the North Sea and increased fear of military conflict between Iran and Israel.
U.S. crude added $1.23 to $97.20 per barrel.
(Additional reporting by Edward Krudy in New York and Marc Jones in London; Editing by Dave Zimmerman)
