Hopes that the US Federal Reserve will cut interest rates today at the end of a key policy meeting were boosted by news of sluggish retail sales at Christmas and a drop in consumer confidence to its lowest level for almost two years.
The Dow Jones index jumped more than 70 points to close at a new high of 5,381.21. The dollar climbed nearly a yen to 107.30, a 23-month high against the Japanese currency and headed above DM1.49 from DM1.4813, helped by worries about the state of the German economy.
Despite the market euphoria, economists are divided about whether the Fed will act to stimulate the economy today.
Josh Feinman, an economist at Bankers Trust, said: "Consumer spending was sluggish in the fourth quarter. This keeps the Fed in easing mode." However, he said the central bank might wait until its next policy meeting on 26 March.
The Fed cut its key Federal Funds rate by a quarter point to 5.5 per cent on 19 December, the first reduction since last July.
Separately, further signs that the Japanese economy is on the path to recovery took shares in Tokyo to a 17 month high yesterday. Figures on vacancies and unemployment were slightly better than expected. The Nikkei index rose more than 133 points to 20,722.44.
Retail sales in the US crept up by only 0.3 per cent in December, despite savage price cuts in the run up to Christmas. The increase was less than analysts had predicted, and was anyway inflated by a surge in car sales - itself smaller than expected. The 4.9 per cent growth in retail sales last year as a whole was the slowest since 1991, at the end of the recession.
American consumer confidence this month has fallen to its lowest since March 1994, according to the Conference Board. The confidence index fell to 87.0 from 99.2 in December. The recent blizzards and the government shut-down were both said to have contributed to the big decline.