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By Samuel Indyk and Rae Wee
LONDON (Reuters) -European shares edged up on Tuesday, though moves were subdued in a holiday-curtailed week, while the U.S. dollar held near a two-year high helped by elevated U.S. Treasury yields as investors bet on fewer Federal Reserve rate cuts in 2025.
The pan-European STOXX 600 index was up 0.3%. Britain's FTSE 100 and France's CAC 40 were both up 0.5%. German stocks were closed for the Christmas holiday.
In Asia, Chinese stocks rose after sources told Reuters that Beijing planned to issue a record amount of special treasury bonds next year as it ramps up fiscal stimulus to revive a faltering economy.
The CSI300 blue-chip index and Shanghai Composite Index both ended 1.3% higher. Hong Kong's Hang Seng Index advanced 1.1%.
The news came shortly after China's finance ministry said authorities would ramp up fiscal support for consumption next year by raising pensions and medical insurance subsidies for residents as well as expanding consumer goods trade-ins.
Still, investors remain cautious on the outlook for the world's second-largest economy, particularly as it faces the threat of hefty tariffs from U.S. President-elect Donald Trump.
"China faces significant challenges entering 2025. The ongoing real estate crisis has shattered consumer confidence while a potential trade war with the United States could trigger the worst growth slowdown in decades," said Ronald Temple, chief market strategist at Lazard.
"Investor expectations have been raised and dashed more than once in China in recent years, and 2025 may prove to be no different. China's economic and market outlook might largely depend on the speed and magnitude of government reforms."
Elsewhere, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4%, tracking Wall Street's Monday gain.
FED FOCUS
After a recent run of central bank decisions, this week is much quieter, leaving the rates theme the main driver of market moves.
"Meagre news and data flow should keep the focus on a more hawkish Fed," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Markets are now pricing in about 35 basis points of easing for 2025, implying one quarter-point rate cut and around a 40% chance of a second.
The two-year Treasury yield, which is sensitive to changes in Fed rate expectations, last stood at 4.3427%, while the benchmark 10-year yield steadied near a seven-month high at 4.5967%. [US/]
"Like markets, the Fed will need to consider U.S. policies on tariffs and immigration in its inflation and growth outlook. We believe the subtle slowing in the U.S. labor market will still be the Fed's paramount concern," said analysts at Citi Wealth.