By Herbert Lash and David Randall
NEW YORK (Reuters) - The euro jumped to a 12-week high against the dollar on Thursday after another shot of European Central Bank stimulus to help economies slammed by the coronavirus pandemic, but world equity markets pulled in the reins after a strong seven-day run.
The euro rallied for an eighth straight session after the ECB said it would increase the size of emergency bond purchases by 600 billion euros ($674 billion) to 1.35 trillion euros, more than the 500 billion-euro increase analysts had expected.
A huge domestic support package from Germany also lifted the euro and briefly pushed European equities higher..
The single currency <EUR=> rose 0.83% to $1.1325 as the dollar index <=USD> fell 0.516%. The euro has gained almost 4% as it advanced the past eight days.
Graphic: Euro zone markets react to ECB https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwybwevw/ECBJUNETHIS%20ONE.PNG
Italy led a rally in southern European bond markets, with 10-year yields tumbling more than 15 basis points to 1.38% <IT10YT=RR> - their lowest since late March.
Spanish, Portuguese and Greek yields also fell, with the gap between 10-year Italian and benchmark German bond yields at its tightest since late March at around 170 bps <DE10IT10=RR>.
ECB policymakers debated expanding their emergency bond purchases by between 500 billion euros and 750 billion euros before settling for a compromise figure, three sources told Reuters.
Euro zone bank stocks surged on the European stimulus, but equity markets slid as investors deemed recent optimism over an economic recovery - which drove the Nasdaq 100 to become the first U.S. equity index to reclaim its intraday record high set in February - as too much in too little time.
Money has been moving out of growth stocks into cyclicals, the economically sensitive companies that have been badly beaten up, such as airlines, hotels, casinos and financials, said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
The rally had been driven by hopes the economy will rebound as businesses reopen, which it will, but at different speeds for different industries, he said.
"There's excessive optimism that everything is going to open up right way and it's going to be fabulous. There's some trepidation about that," Ghriskey said.
A reminder of the economic travails will come on Friday with the Labor Department's jobs report, which is expected to show the U.S. unemployment rate sky-rocketing to a historic 19.7%.
MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.21% to snap a seven-day winning streak and the pan-European STOXX 600 index <.STOXX> closed down 0.72%.
On Wall Street, the Dow Jones Industrial Average <.DJI> rose 11.93 points, or 0.05%, to 26,281.82. The S&P 500 <.SPX> lost 10.52 points, or 0.34%, to 3,112.35 and the Nasdaq Composite <.IXIC> dropped 67.10 points, or 0.69%, to 9,615.81.
U.S. data also weighed on equities as exports dropped by a record 20.5% in April to a 10-year low.
Goods exports plunged 25.2% to $95.5 billion, the lowest since September 2009. Exports of motor vehicles and parts fell to $3.8 billion, the lowest since March 1992. Shipments of consumer goods dropped to $10.4 billion, the lowest since April 2006.
Market optimism about the post-pandemic recovery has reduced the dollar's safe-haven appeal, as have widespread protests in the U.S. following the death of a black man in police custody.
The U.S. currency had began strengthening in overnight trading, pushing the Japanese yen to a two-month low of 109.150. <JPY=EBS.>
The Australian dollar dropped as much as 0.5% to $0.6884 <AUD=D3> after retail sales there plunged, although the country's fourth stimulus package had helped shares gain <.AXJO>.
The yield on benchmark 10-year Treasury notes <US10YT=RR> rose 5.3 basis points 0.8135%.
Oil prices were little changed in choppy trade as investors awaited a decision from top crude producers on whether to extend record output cuts.
U.S. crude <CLc1> rose 12 cents to settle at $37.41 a barrel while Brent <LCOc1> added 20 cents to settle at $39.99 a barrel.
U.S. gold futures <GCcv1> settled up 1.3% at $1,727.40 an ounce.
(Additional reporting by Marc Jones; Editing by Bernadette Baum)