Sterling rose in Asia on Wednesday as accelerating UK inflation fueled talk of an early interest rate rise, while a weaker yen helped to send Japanese stocks to the highest level since last May.
Sterling rallied to a 5- month peak against a currency basket after data on Tuesday showed inflation in Britain jumped to 4 percent, twice the Bank of England's target, prompting Governor Mervyn King to acknowledge that rates might rise more rapidly than economists had expected.
Analysts now expect a rate rise in May and the next market focus is the BoE's inflation report due at 1030 GMT.
Sterling last traded at around $1.6165, nearing a high of $1.6170 overnight. The pound has gained some 3 percent against the U.S. dollar so far this year.
Against the yen, the dollar last traded at around 83.75, not far from an eight-week high of around 83.90 yen hit the previous day, helped by the recent rise in U.S. Treasury yields.
Japan's benchmark Nikkei average <.N225> extended gains, rising 0.4 percent, and broke above 10,800 points for the first time since May as a softer yen lifted exporters and countered declines on Wall Street.
Tokyo Electron <8035.T> and Advantest <6857.T> were among the exporters whose shares gained. Both stocks were up by around 1.7 percent. A weaker yen makes Japanese exports cheaper and boosts company profits. <.T>
It's a weaker yen that's lifting sentiment, but foreign investors are also picking up domestic-demand stocks, said Shinichiro Matsushita, a market analyst at Daiwa Securities, adding that financials were attracting foreign interest due to the Nikkei's strong performance.
High trade volumes also lifted the mood. The Tokyo stock exchange's first section has seen more than 2.0 billion shares change hands for seven consecutive sessions.
ASIAN STOCKS STEADY
Some traders said Japanese retail investors were behind the yen's recent mild drop. The dollar could rise further as it is seen supported with bids at levels near 84.40 yen and 84.20 yen, they said.
Bids are starting to emerge on the downside and I wouldn't be surprised if the dollar were to make another try for the upside, said a trade for a Japanese brokage in Tokyo.
The euro edged up against the dollar, standing at around $1.3530 as of 0253 GMT.
Elsewhere in Asia, MSCI's Asia Pacific share index excluding Japan <.MIAPJ0000PUS> edged up 0.1 percent.
Hong Kong stocks rose 0.7 percent, while the Korea Composite Stock Price Index (KOSPI) <.KS11> advanced 0.3 percent.
In Australia, BHP Billiton
After having rallied 9 percent to a 33-month high in recent weeks, shares of the market leader BHP fell 1.7 percent after posting results. But Australia's benchmark S&P/ASX 200 index <.AXJO> was little changed as banking shares weighed on the broader market.
U.S. crude futures recovered slightly in early Asian trade after the American Petroleum Institute (API) said U.S. crude stocks fell unexpectedly last week as imports fell. NYMEX crude for March delivery was up 0.38 percent, at $84.70 a barrel.
London Brent crude futures saw similar gains, topping $102.
(Additonal reporting by Hideyuki Sano in Tokyo and Masayuki Kitano in Singapore; Writing by Yoko Nishikawa, Editing by Kim Coghill)