By Richard Hubbard
LONDON (Reuters) - Equities and commodities edged higher on Wednesday, supported by widespread expectations of further monetary stimulus from the U.S. Federal Reserve when it ends a two-day policy meeting later in the day.
In quiet trade ahead of the Fed's decision, due at 1730 GMT, safe-haven assets like the dollar, U.S. Treasury bonds and German bunds were also drifting lower with the greenback hitting multi-month lows against some higher yielding currencies.
World markets expect the Fed to expand its current asset purchase scheme, committing to buy $45 billion of U.S. debt a month and extend purchases of mortgage-backed debt, to help sustain the fragile U.S. economic recovery.
"We think that more quantitative easing is coming and this next round will be the most aggressive yet," said Ralf Preusser, head of European rates research at BofA Merrill Lynch Global Research.
Given a general improvement in economic data from the United States and China and signs of stabilisation in Europe, the Fed's decision should underpin demand for riskier assets although there is a risk chairman Ben Bernanke uses the subsequent news conference, at 1915 GMT, to signal a change in the outlook.
"I wouldn't expect too much volatility going into the meeting but afterwards though it will depend on whether they give any guidance on thresholds for unemployment and inflation in the future," said Michael Leister, senior interest rates strategist for Commerzbank.
In any event the meeting's outcome is likely to be quickly overshadowed by developments in talks in Washington designed to avert the "fiscal cliff" of spending cuts and tax increases that will be triggered automatically if no federal budget is agreed..
The squeeze, equivalent to some $600 billion, would take effect in January and is of great concern to the markets because it could tip the giant U.S. economy back into recession and drag down the whole global economy.
President Barack Obama and U.S. House of Representatives Speaker John Boehner exchanged new proposals on Tuesday on the budget, a discussion some investors saw as a sign of progress that added to the firmer tone in the markets.
MSCI's world equity index was up 0.2 percent to 337.72 points, helped by a gain of 0.5 percent in MSCI's broadest index of Asia-Pacific shares outside Japan, which is at 16-month highs.
In Europe, the FTSEurofirst 300 index of top companies extended a steep three-week rally to be up 0.2 percent at 1.141.21 points, a level not seen for 18 months.
London's FTSE 100, Frankfurt's DAX and the French CAC-40 were flat to 0.3 percent higher, while a drop in U.S. stock futures hinted at a softer start on Wall Street.
The strength in equities market encouraged selling of safe-haven assets, pushing the main German Bund futures contract down 22 ticks at 145.19.
AGGRESSIVE MOVE RISK
The euro was mostly steady at $1.3002, well above a low of $1.2876 reached last week. The dollar was suffering against other high-yielding currencies as some investors saw a risk the Fed may ease more aggressively than expected.
"People are selling the dollar on the possibility that the Fed could do more easing than the market is expecting," said Niels Christensen, currency strategist at Nordea in Copenhagen, referring to the extent of monthly Fed bond purchases.
"If it is a neutral decision, they could buy it back on the fact. But if they do more, say above $50 billion (a month), then the dollar would be on the defensive."
The higher-yielding Australian dollar rose as high as $1.0542, its strongest since mid-September, while the greenback fell to an eight-week low against the Canadian dollar of C$0.9856. The New Zealand dollar hit a nine-month high of $0.8407.
In the commodities sector, prices were well supported by the hopes of more monetary easing. London copper was up 0.4 percent at $8,133 a tonne and near a two-month high, while spot gold inched up 0.15 percent to $1,712.56 an ounce.
Brent crude traded above $108 a barrel on the expectations, although concerns about oversupply and weak demand limited the gains.
The abundant supply conditions were expected to be a topic for discussion at the OPEC ministers meeting in Vienna on Wednesday, though no change in the group's current output target of 30 million barrels per day is seen.
Brent futures were up 0.6 percent at $108.64 a barrel while U.S. crude was 0.5 percent higher at $85.99 a barrel.
(Additional reporting by Jessica Mortimer; Editing by Alastair Macdonald)