LONDON -- The euro hit a record high versus the yen and climbed against the dollar on Wednesday, after the previous session's upbeat survey of German business sentiment firmed expectations for further euro zone rate hikes.
European Central Bank President Jean-Claude Trichet, testifying at the European Parliament, said the region's inflation rate was likely to increase again early in 2007, which meant firm and timely action by the ECB was needed to head off risks to price stability.
The ECB is expected to raise rates again next year from the current 3.5 percent. In contrast, dovish comments from Bank of Japan Governor Toshihiko Fukui on Tuesday prompted investors to scale back expectations for a January rate hike to 0.5 percent.
"The market is very focused on carry and since the ECB is not worried about a strong euro, it seems set to continue to increase rates when the BOJ has become slightly more dovish," said Johan Javeus, currency strategist at SEB in Stockholm.
"This supports the long-term trend for continued highs for euro/yen."
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By 1245 GMT the euro was up 0.2 percent at $1.3214, approaching 20-month highs of near $1.3370 scaled earlier this month.
The euro hit record highs near 156.40 yen, before trimming gains to 156.08. The dollar was steady at 118.10 yen.
The euro and sterling have been the big winners among major currencies this year, on the back of rising rates, and seem set to extend their rally into the new year, with the Federal Reserve seen holding rates at 5.25 percent.
On the euro, Trichet repeated the Group of Seven message that excessive volatility and disorderly currency moves hurt growth.
German Deputy Economy Minister Bernd Pfaffenbach said a weaker euro would be better for Germany but the country should be able to cope with a strong single currency.
RECEDING BOJ EXPECTATIONS
After leaving interest rates on hold as expected, the BOJ's Fukui said on Tuesday domestic consumption and consumer prices had softened.
Yen money markets cut the chances of a rate increase in January to about 50 percent from 70 percent after Fukui's remarks. Upcoming data, including next week's inflation figures, is seen as decisive.
The low-yielding yen has suffered as investors sold it to fund purchases of higher-yielding currencies in the carry trade. On Wednesday it hit 8-year lows against sterling.
Elsewhere, the high-yielding New Zealand dollar hit an 11-month high at US$0.6988, erasing almost all of the losses sustained earlier this year.
Recent data have been upbeat, including a sharp narrowing in the third quarter current account deficit and a pick-up in consumer confidence to a one-year high. This has increased the chances of the Reserve Bank of New Zealand raising interest rates from 7.25 percent next year.
"The yield advantage and perhaps the prospect of additional monetary tightening continues to suggest that New Zealand dollar remains well supported," said Jeremy Stretch, strategist at Rabobank.
Markets in Thailand and other parts of Asia recovered after the country's central bank backtracked from stringent new rules on foreign currency inflows it had imposed earlier this week, exempting equities after a plunge in the country's stock market.
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