LONDON: The euro hit a fresh two-year low and world shares fell on Thursday as concern about the global growth outlook and disappointment over the prospects for any near-term response by the U.S. Federal Reserve sapped investor appetite.
Stocks on Wall Street were set to extend Wednesday's losses with the weakening growth picture prompting a number of high-profile corporate earnings warnings in recent days.
Data showing slower growth in Europe, China and the United States and a poor start to the second quarter corporate reporting season had encouraged hopes of a policy response.
"There is not much to expect from economic data, there is not much to expect from earnings, so the only thing markets hope for is more quantitative easing, more stimulus from Europe - more stimulus from everywhere," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said.
A surprise rate cut in South Korea on Thursday following a 50-basis-point cut by Brazil also underscored the growing impact the slowdown was having worldwide.
But the lack of any easing by the Bank of Japan and limited clues in the latest minutes from the Federal Reserve's June policy meeting, released on Wednesday, suggest central banks are still cautious about the need for further easing.
The Fed minutes showed the world's biggest economy would have to weaken further before its central bank took any more easing steps. The minutes did however show some officials felt more stimulus was justified.
With the prospects of further monetary easing pushed back, investors bought the dollar, sending its index against a basket of key currencies, to a two-year high of 83.68.
The euro was pushed to a fresh two-year low of $1.2196, and on the way touched a five-week low against the safe-haven yen of 96.91 yen.
"The euro is likely to weaken further as it will be hurt by the ECB's decision to cut the deposit rate and there will be a shift in funding," said George Saravelos, G-10 currency strategist at Deutsche Bank.
The euro has shed 5.7 percent so far this year, already exceeding losses chalked up in 2011, with losses accelerating after last week's decision by the European Central Bank to cut the deposit rate on funds deposited by banks to zero.
That move saw a massive shift of funds by banks when it came into force on Wednesday, with deposits parked at the ECB down to 325 billion euros from the 800 billion that were left there the previous day.
European shares followed Asian markets lower in response to the dampened prospects for any fresh stimulus measures, sending the MSCI world equity index down 0.75 percent at 305.87 points for its seventh day of losses.
Emerging market stocks fell by nearly 2 percent to 13-day lows of 915.7 points
The FTSE Eurofirst 300 index of top European shares
weakened 0.9 percent to 1,029.43 but in volume that was just 29 percent of the 90-day daily average. It is on track for its first weekly loss since the end of May.
"Anyone who's expecting some sort of quantitative easing come September ahead of the (U.S. presidential) elections, I think is possibly talking their own book because at the end of the day, we're in an election year," said Brenda Kelly, market strategist at CMC Markets.
"It will be a bit of a consolidation effort over the next number of weeks as the bulls and bears fight it out."
The search for safety by investors pushed German government bond yields to new five-week lows, with 10-year debt down two basis points at 1.25 percent.
Analysts and traders expect a test soon of the 1.13 percent all-time low hit in June.
Riskier Spanish and Italian government bond yields reversed early falls to move higher with traders citing fast money accounts such as hedge funds booking profits after price gains this week following moves to help ease Spain's funding crisis.
Italy's one-year borrowing costs fell by more than a percentage point from a month ago at a 7.5 billion euros ($9.2 billion) sale of new 12-month bills on Thursday, but the country faces a stiffer test on Friday when it auctions 5.25 billion euros longer-term bonds.
Markets are also anxiously waiting Friday's second quarter gross domestic product growth number from China, which is expected to show one of the few growth engines in the world economy is faltering.
A Reuters poll showed economists expect China's growth to have slowed to 7.6 percent in the second quarter, its worst performance since the 2008/09 financial crisis.
But analysts are hopeful the world's second-largest economy would have seen the worst between April and June, and expect a pick up in the third quarter as Beijing loosens monetary policy and fast-forwards infrastructure spending.
Oil and base metals markets were softer ahead of the data because China is such a big source of demand, with the disappointment over hopes for Fed action also hurting prices.
Brent crude oil fell 90 cents to just under $100 a barrel at $99.33 and U.S. crude was at $84.95, down 86 cents.
"All across risk assets, including oil, investors are seeing the global economic outlook as a glass half-empty," said Ben Le Brun, a markets analyst at OptionsXpress in Sydney. "There is a lot of caution ahead of the Chinese data."
Gold dropped for a fourth session out of the last six, down 0.6 percent at $1,565.96 an ounce, as investors switched into the stronger dollar.
Gold's fortunes this year have depended heavily on the Fed's attitude towards monetary easing with the greenback and bullion typically moving in opposite directions. Lately the dollar has trumped gold as the preferred safe-haven bet. ($1 = 0.8164 euros)