AUSTRALIAN shares rallied along with global stocks yesterday after the president of the European Central Bank, Mario Draghi, pledged to do "whatever it takes" to safeguard the future of the euro.
Shares, bonds and the euro all rose sharply in Europe after the ECB president dropped the strongest of hints that the bank was preparing to intervene to bring down the crippling borrowing costs affecting the Spanish and Italian governments.
The local market closed up 1.5 per cent, with financials and resource stocks leading the way amid renewed optimism Europe's leaders will not let the common currency break up. The dollar jumped back above $US1.04.
RBS Morgans Brisbane equities director Bill Chatterton said Mr Draghi's comments led the way for a positive day across almost all sectors, especially resources.
"The fear went away a little bit," he said. "There was a bit more confidence back in the market."
In what was seen as the start of a power struggle with Germany's Bundesbank, Mr Draghi told a business conference in London that the ECB had the legal right to act if the high bond yields caused by Europe's sovereign debt crisis were making its interest rate policy less effective. Germany has argued that the ECB has no legal right to copy the interventionist policies adopted by the US Federal Reserve and Bank of England, but Mr Draghi said: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro ... And believe me, it will be enough.
"To the extent that the size of these sovereign premia [high bond yields] hamper the functioning of the monetary policy transmission channel, they come within our mandate ... we have to cope with the financial fragmentation and address these issues."
Financial markets rallied on Mr Draghi's comments, with rates on Spanish 10-year bonds, which had peaked at 7.75 per cent this week, dropping below 7 per cent.