LONDON (AP) -- Markets rallied Tuesday amid growing confidence that a top German court will rule favorably on Europe's bailout fund.
That confidence more than offset any concerns generated by a warning from Moody's that it may cut its credit rating for the United States, the world's largest economy.
The Moody's warning that it may downgrade its triple A score for the U.S. by one notch if progress isn't made next year on reducing the country's debt-to-GDP ratio had been widely-anticipated. Last year, the U.S. lost its top rating from the Standard & Poor's ratings agency.
Investors are more focused on Wednesday's German court ruling on a request to block the country's approval of the eurozone's permanent bailout fund, the European Stability Mechanism, or ESM. A last-minute appeal to delay the decision was dismissed Tuesday.
"Market participants appear convinced that the court will allow the German president to sign the ESM into law," said David Morrison, senior market strategist at GFT Markets.
In Europe, Germany's DAX rose 01.34 percent to 7,310 while the CAC-40 in France advanced 0.9 percent to 3,537.
The FTSE 100 index of leading British shares underperformed its peers, trading 0.02 percent lower at 5,792, with luxury clothing brand Burberry topping the list of sinking stocks. The company's shares lost a fifth of their value after it warned that profits would be at the lower end of market expectations because of lackluster sales.
U.S. stocks were performing relatively strongly, with the Dow Jones industrial average up 0.6 percent at 13,341 and the broader S&P 500 index 0.4 percent higher at 1,435.
Investors will also be keeping a close watch on developments in Athens as the Greek government meets its international debt inspectors. Greece has to convince the so-called "troika" it is abiding by the terms of its bailout agreement so it can get its next tranche of rescue money to avoid a chaotic default on its debt.
The week ends with a meeting of eurozone finance ministers in Nicosia, Cyprus, where Greece will likely to be the major topic of discussion.
Spain will also be in the spotlight this week as the government decides whether to tap a European Central Bank bond-buying program that is largely designed to keep a lid on the country's borrowing rates.
Last Thursday's announcement by ECB president Mario Draghi that the central bank was willing to buy up an unlimited amount of short-term bonds of those countries that request help have been welcomed in financial markets.
"The ECB's bond-buying program is to be welcomed and Draghi to be lauded but the plan targets the symptoms of the euro area's malaise, not its cause," said Neil Mellor, an analyst at the Bank of New York Mellon. "The solution to the euro area's crisis will only appear on the horizon once it has been preceded by a brighter growth outlook."
The euro has been one of the big gainers over the past few weeks, and the currency is now trading near four-month highs against the dollar. It was up a further 0.8 percent Tuesday at $1.2864.
But it is not all about the euro's strength — the dollar has been undermined by expectations that the Federal Reserve will enact another monetary stimulus. Whether it's ready to sign off on another stimulus will emerge on Thursday after the conclusion of the latest two-day policy meeting.
Investors remain unsure whether the Fed will act now, especially as it may not want to become a key point of debate in the upcoming U.S. presidential election.
Earlier in Asia, Japan's Nikkei 225 index sank 0.7 percent to close at 8,807.38 but Hong Kong's Hang Seng reversed earlier losses to close 0.2 percent higher at 19,857.88. Mainland Chinese stocks also fell, with the Shanghai Composite Index losing 0.7 percent to close at 2,120.55.
Oil prices ticked higher as sentiment across financial markets improved. The benchmark New York rate was up 42 cents at $96.93 a barrel.