Sterling hits 2-1/2 week high on upbeat UK retail sales while Merkel saves the day for Europe by backing ECB President Mario Draghi's vow to preserve the Euro.

World shares rose to near 3-1/2-month highs on Thursday after supportive comments from Germany on the European Central Bank's efforts to contain the region's debt crisis, while disappointing U.S. data weakened the dollar.

Investors were heartened by comments from German Chancellor Angela Merkel who said ECB President Mario Draghi's declarations last month to do whatever was necessary to save the euro were "completely in line" with the approach taken by European leaders. Draghi was criticized within Germany in the wake of those comments.

Merkel's remarks raised the prospect the ECB might soon buy the sovereign debt of Spain, Italy and other debt-laden euro zone members whose high borrowing costs could become crippling. Her comments sent 10-year Spanish bond yields to a one-month low of 6.55 percent. "Anything from the German quarter that expresses some support is very positive for stocks, peripheral debt and other risky assets. That means the ECB would not be thwarted with its efforts.

The euro rose against the dollar and yen o n Thursday as investors pared bearish bets against the currency on raised expectations of action from the European Central Bank to contain the region's more than two-year old debt crisis.

The euro last traded at $1.2354 on the day. The Euro rose against the yen at 97.94. The NZD/EUR traded down from highs above 0.6580 to around 0.6560 at present while the EUR/AUD is trading at 1.1754. A Reuter’s poll in early August showed the ECB was seen as likely to begin buying Italian and Spanish bonds in September and to cut its main refinancing rate to a record low of 0.5 percent.

The Australian and New Zealand dollars held modestly firmer on Thursday, underpinned by stronger Asian stocks, while bond prices fell to their lowest since early May on fading expectations of imminent easing globally. The biggest movers of the session were Australian bond futures, which skidded to three-month lows, tracking a fall in U.S. Treasuries.

The New Zealand dollar last traded at $0.8107. It avoided a further slide thanks to an ongoing rise in global prices of dairy products, New Zealand's biggest export, at the latest Fonterra auction. But traders report that a pick-up in demand for the U.S. dollar would keep the kiwi on the backfoot in the near term.

The AUD/USD found support around 1.0480 overnight before trading up to 1.0520. The AUD is also being underpinned by the market revising its expected RBA rate trajectory. Next RBA meeting onSep 4. The unemployment rate has remained in a range of 5 percent to 5.3 percent for the past 15 months, with the economy adding jobs in four of the past five months, prompting the central bank to keep interest rates on hold in July and August after 75 basis points of cuts in the prior two months. Fitch analysts led by Ben Newey wrote in a report Australia is "one of the more robust countries in the world”.

Despite concerns on the state of UK economy the recent data out of UK has been impressive and so far added to the appreciation in Sterling. Sterling rose to its highest in more than two weeks against the dollar on Thursday after UK retail sales unexpectedly grew in July, raising the prospect that the economy may not be as weak as previously thought. The British pound was also bolstered after the dollar lost ground following the release of soft U.S. data.

Sterling rose to $1.5739, its highest level since late July after a rise in U.S. jobless claims and sluggish housing data. Analysts also report the pound could gain a bit more against the euro as sterling deposits offer better returns than their euro zone counterparts. Three-month euro deposit rates are at 0.36 percent, nearly half the level of sterling rates. The euro fell to 78.13 pence; it’s lowest in more than two weeks, from around 78.32 pence beforehand. The pound's bounce helped the trade-weighted sterling index rise to 84.40, its highest since July 31, data from the Bank of England showed.

The Federal Reserve provided $7 billion of liquidity to the European Central Bank in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday. The European Central Bank was the sole central bank tapping the Fed's facility in the week ended Aug. 15. The terms of the swap were seven days at 0.64 percent. The Federal Reserve has established swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan in an effort to respond to the re-emergence of strains in short-term funding markets in Europe.

On the US economic front, a small, unexpected rise in U.S. jobless claims and a surprise drop in housing starts renewed expectations the Federal Reserve would engage in a third round of large-scale bond purchases, dubbed QE3, to help the sluggish economy, spurring early appetite in safe-haven U.S. and German government bonds. A report from the Philadelphia Federal Reserve also signaled business contraction in the U.S. mid-Atlantic region in August, though it was milder than in July. The initial rebound in Treasuries and Bunds markets faded with benchmark U.S. yields approaching their 200-day moving average, a bearish market signal.

On Wall Street, the Standard & Poor's 500 index has managed to hold above 1,400, close to a four-year high. Analysts said stocks will likely stay around current levels through options expiration on Friday. In late afternoon trading, the Dow Jones industrial average was up 89.13 points, or 0.68 percent, at 13,253.91. The S&P 500 was up 10.99 points, or 0.78 percent, at 1,416.52. The Nasdaq Composite Index was up 35.03 points, at 3,065.96. CISCO leads charge among key stock movers, Cisco Systems rose 9.5 percent to $19.00 a share after the world's largest network equipment market reported better-than-expected results and raised its dividend. Facebook shares plummeted to new lows since it’s IPO launch. The stock is currently trading at $19.83 per share after launching at $38 per share.

Doubts about central banks' commitment to take aggressive steps to boost their economies have kept gold prices in a trading range in the last four months. Spot gold last traded at $1614.75 where it has been trading between $1590 to $1618 range. Global gold demand in the second quarter fell by 7% from the same period a year ago to 990 metric tons, largely as a result of declines in the world’s two largest consuming nations of China and India, the World Gold Council said Thursday

Key Events:

NZD- PPI Input q/q
EUR- German PPI for July / EU Trade Balance for June
CAD-CPI M/M
USD- University of Michigan Confidence indicator