The euro rally continued Wednesday, shrugging off poor industrial production data from Spain and Italy to rise to its strongest level against the yen in over three years and a one-month high against the dollar, as the Bank of Japan's 8301.JA -0.70% aggressive easing steps announced last week continued indirectly to support the single currency.
The euro rose above ¥130 against the hobbled yen for the first time since January 2010 and hit a one-month high of $1.3122 against the dollar, as the BOJ's extra monetary stimulus announced last week continued to be the central theme driving foreign-exchange markets. Market-watchers are braced for funds to flow out of Japan as official buying compresses the country's government bond yields.
"Whilst the flows haven't yet been seen, the market is positioning for increased outflows from Japan and the euro is the main benefactor," said Michael Sneyd, a foreign-exchange strategist at BNP Paribas BNP.FR +3.56% in London.
Euro-zone government bond markets in particular are feeling the benefit, said Mr. Sneyd, and that is supporting sentiment towards Europe, which in turn boosts the euro, he added.
European stock markets were higher Wednesday, while yields of perceived weaker euro-zone countries such as Spain and Italy continued to ease, shrugging off the mixed run of industrial production numbers, with Spain and Italy disappointing but France beating forecasts.
"Aside from the general perception that Japanese investors' hunt for yield will drive flow in the coming months, the positive tone in overnight markets was helped by Chinese March trade data," said Adam Cole, head of G10 foreign-exchange strategy at RBC Capital Markets.
The commodity-linked currencies of Australia, New Zealand and Canada all gained ground against the dollar after China posted a $880 million trade deficit for March compared with February's $15.25 billion surplus. A particular boost to the commodity bloc of currencies came from data showing Chinese imports had increased 14.1% in March, beating February's 15.2% decline and a 6.1% rise tipped by economists.
The dollar did make ground against the yen, but the key ¥100 level still remained elusive in European trading hours. But with the new BOJ's leadership's commitment to reaching a 2% inflation target in the next two years, it may only be a matter of time before the dollar breaks that key level.
"We think the yen is only about half way through its current declining trend," UBS UBSN.VX +2.51% said, forecasting the dollar to trade at ¥110 at the end of 2013 and ¥120 at the end of 2014.
In smaller currencies, the Norwegian krone came under pressure against the euro after inflation data for March came in at 0.9% on the year, lower than the 1.1% expected by the market.
Looking ahead, the release of the Federal Open Market Committee's March meeting minutes at 1800 GMT will be closely watched for signs on when the Federal Reserve will end or reduce its current stimulus program of quantitative easing.
In emerging markets, the Polish zloty strengthened against the euro after the central bank kept the benchmark rate at its all-time low of 3.25%.
At 1052 GMT, the euro was trading at $1.3098 against the dollar, compared with $1.3082, late Tuesday in New York, according to trading system EBS. The dollar was at ¥99.43 against the yen, compared with ¥99.03, while the euro was at ¥130.25, compared with ¥129.65. The pound was trading at $1.5333 against the dollar, compared with $1.5341 late Tuesday in New York.
The Wall Street Journal Dollar Index, which tracks the U.S. dollar against a basket of major currencies, was at 73.594 from 73.594.
