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Japan's Nikkei jumped 7.7 percent, posting its biggest
single-day gain in nearly seven years, after Prime Minister
Shinzo Abe's comments raised hopes of more fiscal stimulus. That
set the stage for a 2 percent rally in European stocks with Wall
Street also set for a rise.
The dollar was up 0.7 percent at 120.62 yen while the euro was
down 0.5 percent at $1.1145, with the single currency also
suffering due to widening interest rate differentials between
two-year U.S. Treasury yields and their comparable German bunds.
The euro had been supported in recent weeks as investors unwound
risky euro-funded carry trades which involved selling euros to
buy high-yielding currencies for better returns.
"In the short term, US-German rate spreads are pushing back to
their widest of the year and could start to weigh on the euro,"
said Chris Turner, head of currency strategy at ING.
"At the same time if there is -- albeit temporarily -- a
recovery in the risk environment, we should see a return of
euro-funded trades."
Ever since China devalued its currency in early August, a move
that sent shockwaves across global markets, the dollar has
followed a pattern of moving with the ebb and flow in risk
appetite. That pattern tends to favor the safe-haven yen and to
a certain degree the low-yielding euro when riskier assets such
as stocks and commodities are widely sold.
Chinese Prime Minister Li Keqiang said on Wednesday the recent
adjustment in the yuan was "very small" and there was no basis
for continued devaluation. Li added Beijing did not devalue the
yuan in order to stimulate the country's exports, soothing fears
of a prolonged currency war.
Meanwhile, the Canadian dollar fell against the U.S. dollar to
C$1.3229 after gaining 0.8 percent on Tuesday as crude
oil, a major export for Canada, surged. A tumble in crude prices
had sent the loonie to an 11-year low last month.
The Bank of Canada is expected to keep rates unchanged at 0.5
percent in light of recently upbeat data after already cutting
twice this year, although market participants are readying for
dovish undertones. The decision is due at 1400 GMT.
"The statement is likely to reflect caution on recent market
volatility and oil prices, adding a dovish tone. With market
pricing of future rate cut risk very much loaded towards the
back end, we see the risk to the downside for the CAD today,"
said Adam Cole, head of G10 FX strategy at RBC Capital.
(Additional reporting by Shinichi Saoshiro; Editing by Andrew
Heavens and Mark Potter)
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