The U.S. dollar fell to a four-month low on Wednesday as optimism about a global recovery and concerns about U.S. fiscal health reduced its safe haven appeal, while oil prices near $60 a barrel helped energy shares push most Asian stock markets higher.
Major European stock indexes were expected to open as much as 1.1 percent higher, according to financial bookmakers, with energy and mining companies expected to benefit from higher commodity prices.
Government bonds continued to fall out of favor because investors were looking for higher returns elsewhere, with 10-year Japanese government bond futures hitting a six-month low and U.S. Treasuries under pressure.
The latest bout of dollar weakness has coincided with surging global equity markets as investors large and small begin to put money back to work that had been locked safely away in dollar-denominated assets.
The decline in the U.S. dollar that we have seen over the past few weeks coupled with rising stock markets seems reflective of an asset allocation shift out of cash into equities, Ashley Davies, currency strategist with UBS in Singapore, said in a note to clients.
Davies added the asset shift could pick up speed if more investors bail out of bonds amid worries about a flood of upcoming supply and skepticism about government projections about cutting budget deficits.
Adding to souring sentiment on the U.S. dollar, a commentary in the Financial Times about the risk of the U.S. government losing its top credit rating touched a nerve among traders.
The ICE Futures U.S. dollar index was down 0.4 percent <.DXY> after earlier plumbing its lowest level since Jan 9. The index has fallen 8.1 percent since March 9, when a global stock market rally started.
The euro rose to its highest point against the dollar in seven weeks at around $1.3722, before easing to $1.3710, up 0.5 percent on the day.
Stronger regional currencies resulting from portfolio inflows and the weaker dollar are putting pressure on central banks to temper their rise to shield already battered export sectors. The Bank of Thailand intervened to slow the rise of the baht on Wednesday.
RISKY ASSETS EN VOGUE
U.S. crude for June delivery rose 1.6 percent to $59.76 a barrel after briefly topping $60 on Tuesday, its highest level since November 2008.
An unexpectedly large draw down of U.S. inventories last week, reported by the American Petroleum Institute on Tuesday, helped buoy bullish sentiment in oil.
Gains in commodity prices in the last few months have not been as big as equity markets since they have been stymied by high inventory levels. However, in the last week the falling dollar and evidence of demand in China have propped them up.
Copper for three-month delivery traded in Shanghai rose 1.4 percent, after the three-month copper futures on the London Metal Exchange rose 0.9 percent overnight.
In equities, a brief rally in defensive sectors fizzled by midday and sectors that benefit from positive turns in the business cycle -- consumer discretionary, technology and energy -- were leading by afternoon.
Signs that consumer spending incentives and government infrastructure projects were boosting China's economy have given added confidence to investors that a recovery is slowly unfolding and a shift to riskier assets has room to run.
Dennis Stattman, head of BlackRock's global allocation fund, said in a note he was adding to the fund's equity position and diversifying fixed-income holdings from only government bonds to include convertible and corporate bonds on early signals of a turnaround.
We're gradually increasing exposure to what people would consider 'risk,' in both stocks and bonds, he said.
Japan's Nikkei share average <.N225> edged up 0.5 percent in choppy trade, helped by a 6.3 percent rise in shares of Nissan Motor Co <7201.T> after the carmaker forecast a smaller-than-expected operating loss.
Hong Kong's Hang Seng index <.HSI> rose 0.7 percent with shares of China's top offshore oil and gas producer CNOOC Ltd <0883.HK> the biggest boost. CNOOC jumped more than 8 percent.
The energy sector was the main gainer in the MSCI index of Asia Pacific shares traded outside Japan <.MIAPJ0000PUS>, which rose 0.8 percent, just below a seven-month high struck on Monday. The index has gained 45 percent since March 9.
The yield on the benchmark 10-year U.S. Treasury note rose about 3 basis points to 3.21 percent ahead of U.S. retail sales data due later in the day, with dealers are not anticipating a change to the general theme of improving economic conditions.
(Editing by Kim Coghill)