By Carolyn Cohn
LONDON (Reuters) - The dollar rose and European stocks soared on Friday, propelled by huge gains in banking stocks as the U.S. government considered a comprehensive plan to deal with toxic bank assets.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke intend to work through the weekend on a plan to deal with mortgage-related assets that are choking the financial system.
Hopes that the plan will sort out some of the problems of U.S. and UK banks drove Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), which is buying some of Lehman Brothers' assets, up as much as 39 percent. Shares in HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) climbed 39 percent and its new owner Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) rallied 26.1 percent.
"At present, confidence is the most important factor and this will only be maintained if the rescue plans are delivered on both sides of the Atlantic," said Andrew Turnbull, senior sales manager at ODL Securities.
UK banking shares also got a boost after UK regulators slapped a temporary ban on short selling of banking stocks.
The FTSEurofirst 300 index jumped over 5 percent, and the MSCI main world equity index .MIWD00000PUS rose 2.28 percent to 308.47.
The dollar rallied more than 1 percent against the euro to $1.4169 and nearly 2 percent against the yen to 107.68.
Safe haven government bonds fell on news of the U.S. plan, which congressional aides said could include proposals similar to the Resolution Trust Corp, set up to clean up bad debts from the savings and loan crisis in the late 1980s.
Euro zone government bond futures dropped more than a full point, in line with weaker U.S. Treasuries.
Meanwhile, emerging markets staged a comeback, helped partly by local government measures.
The MSCI emerging equities index .MSCIEF rose 6 percent, after plumbing its lowest in more than two years on Thursday, while emerging sovereign debt spreads 11EMJ squeezed in by 29 basis points to 390 bps over U.S. Treasuries.
The Chinese government said it would buy shares in three of the biggest state-owned banks and ditched a tax on stock purchases. The measures helped propel Shanghai's composite index .SSEC up 9.5 percent.
Russian anti-crisis measures drove the MICEX and RTS .IRTS stock markets up 23 and 15.5 percent respectively, after a 1-1/2 day trading halt earlier this week on sliding markets.
Central banks in the United States, Europe, Japan and elsewhere have injected massive amounts of liquidity into money markets, culminating in a coordinated offer on Thursday of $180 billion in funding.
However, the one-month yield on U.S. Treasury bills was still close to zero, reflecting heavy demand for short-term liquidity.
The overnight U.S. dollar lending rate has eased but was still volatile, trading between 2 percent and 5 percent.
The spread between 30-day AA-rated commercial paper and A2/P2 non-financial commercial paper hit 280 bps, twice the size of a spike in late 2000 which prompted a surprise U.S. half-point inter-meeting rate cut, according to Morgan Stanley.
"The evidence is clearly that the central banks have not regained authority over the financing markets as yet," the bank said in a client note.
"They still have dry powder -- much more money can be injected, moral suasion can be used to make the banks lend, and official rate cuts remain open."
Gold dropped over 2 percent to $831.25 on the firm dollar, but U.S. crude oil futures rose as much as $2 on growing U.S. and Nigerian supply concerns before easing to $99.11 a barrel.
(Additional reporting by Atul Prakash, editing by Patrick Graham)
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