Asian shares rose on Wednesday as upbeat U.S. economic data plus signs of improving capital positions at big American banks stoked appetites for risk, while reduced expectations for more monetary easing by the Federal Reserve underpinned the dollar.
The dollar eased from a seven-week high against a basket of major currencies of 80.320 <.DXY> hit on Tuesday, but touched a fresh 11-month high of 83.28 yen.
A brighter economic outlook hoisted U.S. equities to multi-year highs, with the Standard & Poor's 500 Index <.SPX> closing at its highest level since June 2008, while the Dow Jones industrial average ended at its loftiest since December 2007.
Shares in Asia started robustly on Wednesday, though gains were later pared.
The MSCI Asia Pacific ex-Japan index <.MIAPJ0000PUS>, carrying the momentum from overnight, was up 1.2 percent on Wednesday morning and later 0.7 percent, while Japan's Nikkei average <.N225> reached a seven-month high. It quickly rose 2.2 percent and closed was up 1.5 percent, aided by a softer yen and rallying U.S. stocks. <.T>
Australian shares rose 0.9 percent to a two-week high, driven by top miners and banks, and financials drove South Korean up to a seven-month high.
Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open about 0.5 to 0.6 percent higher. <.L> <.EU>
The markets do run very much on confidence and at the moment, that's improved greatly. The international markets, in particular Wall Street, have been having a nice rally, said Grant Williamson, a partner at New Zealand brokerage Hamilton Hindin Greene.
The dollar's strength undermined the euro, which hit a one-month low of $1.3034 (8326 pence). Gold edged up 0.1 percent at $1,676 an ounce on bargain hunting following Tuesday's 2 percent drop in prices, but a firmer dollar capped the upside.
After rallying the previous day, copper eased 0.4 percent to $8,522 a tonne while Brent April crude held near $126 a barrel after settling at $126.22 on Tuesday, the highest close since April 8, 2011.
Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by about 7 basis points.
ZEW, equities, GDP: http://link.reuters.com/cag54s
Components of U.S. GDP: http://link.reuters.com/fan36s
U.S. retail sales: http://link.reuters.com/dew96s
WARMING RISK GAUGE
Reflecting improved sentiment, the VIX index <.VIX>, which measures expected volatility in the Standard & Poor's 500 index <.SPX> over the next 30 days, plunged below 14 on Tuesday to its lowest since mid-2007.
The current levels are near a major support base, which has caused the VIX index to rebound sharply and trigger turmoil in markets. But that is not necessarily a reason to look for an immediate turnaround in the stock market, analysts said, meaning there may be more room for equities to rise.
The U.S. central bank slightly upgraded its economic outlook on Tuesday, saying it expects moderate growth over coming quarters and a gradual decline in the unemployment rate, although it said the jobless rate remains elevated.
U.S. retail sales posted their largest rise in five months in February, data showed on Tuesday, reflecting growing confidence by Americans to purchase goods.
With U.S. authorities taking aggressive measures to safeguard growth and the nation's financial system after the collapse of Lehman Brothers in late 2008, the capital positions of U.S. banks have improved substantially since then.
Most of the largest U.S. banks passed their annual stress test, the Fed revealed in an earlier-than-expected release of the results, which show institutions are more resilient against financial shocks.
In Europe, Germany's ZEW economic think tank's monthly sentiment survey jumped in March to its highest level since June 2010, confirming hopes that Europe's largest economy has recovered from a weak patch.
Some analysts said the current optimism may be sapped if signs emerged of fragility in U.S. growth momentum or of the Chinese property market and bank loan growth slowing.
China's property sales may drop about 20 percent in terms of volume and about 10 percent in weighted prices in the second quarter, but while the decline may be rapid, it will be constrained, said Guy Stear, head of research with Societe Generale in Hong Kong, at a seminar in Tokyo on Wednesday.
This year was likely to be the bottom for China's property market, he said.
China's home prices are still far from falling to a reasonable level, and efforts to curb real estate speculation must be maintained or risk chaos and a property bubble, which would harm the economy if it burst, Premier Wen Jiabao said on Wednesday.
Wen also told a news conference on the last day of the 2012 National People's Congress meeting that China will speed up economic reforms and let its currency float more freely in a bid to make growth more sustainable and cushion the country against external pressures and property market risks.
(Additional reporting by Miranda Maxwell in; Melbourne and Reuters FX analyst Krishna Kumar in Sydney; Editing by Richard Borsuk)