European shares hit 5-1/2-year high

LONDON, Jan 21 (Reuters): European shares hit fresh 5-1/2 year highs on Tuesday, tracking Asian shares higher as Chinese money rates eased, while the dollar got a boost from a report the Federal Reserve would again trim its bond buying next week.

Chinese shares rebounded from six-month lows and money market rates fell after the central bank dumped more than 255 billion yuan ($42 billion) into the financial system, easing concerns another credit crunch was underway less than a month after a late December squeeze.

Investors will also be watching liquidity operations by the European C entral Bank later on Tuesday to see if it acts to correct a recent sharp rise in money rates, a tightening of conditions that could retard the region's recovery.

The key ZEW indicator of German investor sentiment for January will be released at 1000 GMT. European shares hit 5-1/2 year highs, though world stocks were steady.

One big loser among European blue-chips was Alstom , down 12 per cent after the power and transport engineering firm lowered its annual profit and cash flow targets. US stock futures were pointing higher, with the S&P 500 up 0.27 per cent and the Dow up 0.5 per cent.

The dollar bounced to 104.68 yen and the euro edged down to $1.3532, not far from Monday's two-month trough of $1.3508, after the Wall Street Journal reported the US Federal Reserve is on track to trim its bond-buying programme for the second time in six weeks, paring back by $10 billion to $65 billion a month.

A lacklustre US jobs report had not diminished the central bank's confidence in the economy, wrote Fed watcher Jon Hilsenrath. Investors suspect he has an inside line to policy makers and put a lot of weight on his opinion.

It was enough to nudge 10-year US Treasury yields up 3 basis points to 2.85 per cent, following the US market holiday on Monday. German government bond futures fell 11 ticks.

The yen was also under pressure as Japan's central bank began a two-day policy meeting at which it is expected to keep its massive quantitative easing programme unchanged.