Rallying stocks hurt yen, German inflation helps euro

Credit: Reuters/Kim Kyung-Hoon

1 of 2. A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012.

A greater appetite for risk drove the MSCI World equity index .MIWO00000PUS near its October 2007 record high and Japan's Nikkei .N225 closed at its highest in nearly six years. Germany's DAX .GDAXI climbed to a new peak.

All this kept pressure on the yen, usually the most commonly used funding currency for Japanese and overseas investors seeking higher returns in assets such as stocks.

Trading was light with U.S. financial markets shut for Thursday's Thanksgiving holiday.

The euro rose 0.3 percent, to 139.175 yen, just shy of its June 2009 high of 139.26 yen. A move above that level would take the euro to a five-year high. The dollar also hit a six-month high of 102.375 yen.

'The latest yen move is led as much by euro/yen as by dollar/yen and has further to go,' said Kit Juckes, currency strategist at Societe Generale. 'Bond outflows from Japan are picking up, and though this doesn't correlate particularly well with anything the yen does, I think dollar/yen is on its way to 110.'

With government debt yields anchored by the Bank of Japan's massive bond-buying program, Japanese investors have been seeking higher returns abroad. They amassed nearly $14 billion in foreign bonds last week in their seventh straight week of net buying - the longest such run in a year.

Many investors expect the yield differential between U.S. Treasuries and JGBs to widen, though the impact of foreign bond buying on foreign exchange markets is limited if investors hedge their bond purchases.

Overall, though, the dollar underperformed on lingering doubts over when the Federal Reserve will start withdrawing monetary policy stimulus in the near term. The dollar index was down 0.15 percent at 80.610 .DXY.

'As long as the dollar remains weak and draws little support from Fed policy, we will see the euro push higher,' said Neil Mellor, currency strategist at BNY Mellon. 'That will be unhelpful for euro zone exporters.'

Against the dollar, the euro rose to a one-month high of $1.3619. It was helped by an acceleration in German annual inflation for November, which could push up the consumer price index for the broader euro zone.

Euro zone 'flash' consumer price inflation for November will be released on Friday. A 0.8 percent annual reading is forecast, up from 0.7 percent in October. Any signs that disinflationary pressures are easing will take some pressure off the ECB to loosen policy further, underpinning the euro.

Last month, a surprise drop in German inflation drove the euro zone CPI lower, triggering a European Central Bank interest rate cut.

(Editing by Nigel Stephenson, Larry King)

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