The euro gained versus the dollar and the yen after the Federal Reserve and five other central banks agreed to lower the cost of emergency dollar funding for European banks in response to the region's debt crisis.

"It caught the market by surprise," said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world's largest custodial bank. "It is a further measure being taken to help the liquidity problem that is due to continued crisis in Europe."

The dollar dropped against all of its 16 most-traded counterparts as investors sought higher-yielding assets after the move was announced. The 17-nation currency weakened earlier after euro-area finance ministers conceded efforts to expand their bailout fund missed the target and said they would seek a greater role for the International Monetary Fund.

The euro climbed 1.3 percent to $1.3488 at 8:57 a.m. in New York after touching $1.3501 earlier, the strongest level in a week. The yen dropped 0.7 percent to 104.44 per euro and rose 0.7 percent to 77.42 per dollar.

The central banks agreed to reduce the interest rate on dollar liquidity swap lines and extend their authorization through Feb. 1, 2013. The rate was cut to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are involved in the coordinated action, the Fed said.

'To Ease Strains'

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the statement said.

The cost for European banks to fund in dollars fell for the first time in six days, dropping from the most expensive level since the depth of the financial crisis. The three-month cross- currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 1.36 percentage points below the euro interbank offer rate. It touched 1.63 percentage points earlier, the most expensive on an intraday basis since October 2008.

The dollar and yen slid earlier as China cut the amount of cash that banks must set aside as reserves to spur growth, damping demand for safer assets. The People's Bank of China said reserve ratios will decline by 50 basis points effective Dec. 5, the first reduction since 2008.

David Fuller's view This unexpected announcement is important for a number of reasons:

1. For once, the markets get a positive surprise. No doubt some pundits will dismiss it as irrelevant or inflationary, which is to miss the point. The action is highly relevant psychologically, given all the global angst expressed recently. This decision by the central banks is certainly not deflationary; it might be inflationary, and most investors regard the prospect of some inflation as preferable to the protracted deflationary slump feared by many.

2. Today's announcement is also extremely important psychologically because it shows that central banks are cooperating. Until this announcement they were perceived as pursuing their own agendas, particularly the ECB, against the background of a growing crisis.

3. The move is also another form of monetary easing. Prior to today's announcement by the CBs there was a growing concern that bank lending would dry up as we last saw following the collapse of Lehman Brothers. CBs have signalled that they are aware of the risk, and taking appropriate action. Monetary easing remains a powerful tailwind for stock markets.

Following today's action, which are the winners and losers among markets?

Winners: Equities and commodities, as short covering occurs and some long-only buyers return.

Losers: Low yielding, long-dated government bonds and the USD, as 'safe haven' buying dissipates.