By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - World stock markets put in a second consecutive session of bargain-hunting gains on Wednesday following a huge rally on Wall Street and amid widespread expectations of a sharp cut in U.S. interest rates.
The mood left the dollar generally weaker.
The Fed is widely expected to cut its key rate for the ninth time since September 2007 later on Wednesday, at least by 50 basis points. That would take rates down to 1.0 percent.
Others are in the same frame of mind, given the deteriorating economic outlook and market turmoil.
The Bank of Japan will consider lowering its policy rate at a meeting on Friday, according to sources familiar with the matter. The Bank of England and the European Central Bank are both forecast to lower borrowing costs as well next week.
How much any of these actions will turn around near-term prospects for major economies is unclear, especially since the U.S. labor market is forecast to have lost nearly 180,000 jobs this month.
But stock markets were rallying on the prospect and by a hefty bout of bargain hunting after recent losses.
MSCI's all-country world index was up 2.5 percent after gaining 7 percent on Tuesday, led by 10 percent-plus gains on Wall Street.
The emerging market counterpart was up 2.6 percent, but has still lost more than 60 percent so far this year.
"Enjoy the party while you can," said David Buik, market commentator at Cantor Index in London, expressing the broad view that markets are set up for a bear market rally -- that is, a burst of gains in a generally downward trend.
The pan-European FTSEurofirst was up 4.3 percent.
Earlier, Japan's Nikkei average climbed 7.7 percent or 589.98 points to finish at 8,211.90. It has gained 14.6 percent over the past two days, but is down 46 percent for the year-to-date.
YEN REBOUNDS
The dollar was generally weaker with the yen climbing after suffering one of its biggest ever drops against the dollar on Tuesday.
The dollar fell 1.5 percent from late U.S. trade to 97.27 yen after having surged as high as 99.79 yen on trading platform EBS, well above the 13-year low of 90.87 yen struck last week.
On Tuesday the dollar soared more than 6 percent against the yen -- the biggest one-day gain since 1974 and the second-biggest since being allowed to trade freely in 1973, according to data from Reuters Ecowin.
The euro gained a bit against the dollar to $1.2734, but overall the dollar was down.
"We've seen a significant reversal of risk aversion and those currencies which were sold against the dollar aggressively in the last month have seen a bit of a reversal," said James Shugg, an economist at Westpac.
The euro zone 2/10-year government bond yield curve rose to its steepest level since March 2005 as the short-end outperformed longer-dated paper on hopes of interest rate cuts.
The spread widened to 123 basis points from around 120 basis points late on Tuesday with the two-year yield hovering near a three-year low of 2.51 percent.
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