Asian shares and the euro paused on Thursday, with investors seeking clues from European Central Bank President Mario Draghi on growth prospects for the euro zone economy at a policy meeting later in the day, amid optimism that the worst may be over.
Japanese equities underperformed Asian bourses as a break in the yen selling pulled them from Wednesday's four-year peak. But shorter-dated Japanese government debt rallied, sending two-year JGB yields to their lowest since September 2002 at 0.030 per cent, on expectations that the central bank will cut interest rates to zero.
The yen's broad weakness has been driven by expectations for radical reflationary policy from the Bank of Japan, under Prime Minister Shinzo Abe's push for a mix of anti-deflation policies.
"Hopes for 'Abenomics' are supporting the mood, but investors are also sensitive to the currency moves, so right now, even small uncertainty on Europe can be a reason to pull back," said Hiroichi Nishi, an assistant general manager at SMBC Nikko Securities.
Japan's Nikkei stock average .N225 fell 0.8 per cent, as investors took profits on export-driven firms. The benchmark closed at its highest level since October 2008 the day before when the yen slipped to fresh lows. .T
The MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.1 per cent near a one-week low, after reaching a 18-month high on Monday. Asia tracked overnight lackluster US stocks, with Standard & Poor's 500 Index .SPX ending nearly flat after a five-year high earlier in the week.
Australian shares AXJO. gained 0.3 per cent, outperforming their Asian peers, on a rise in iron ore prices supporting the top miners and on higher earnings from National Australia Bank and Telstra Corp. Australian jobs data for January beat market expectations.
Recent data suggesting a moderate global economic recovery, even if it lacked strong momentum, underpinned industrial metals, keeping London copper prices near four-month highs and platinum and palladium near their highest level in 17 months on hopes of a better demand.
Data from deflation-swamped Japan was also positive, with the country's core machinery orders surging unexpectedly in December for a third straight month of increases and firms expect more improvement in the first quarter.
But analysts said Asian economies were still relying on exports to power their way to growth.
"One of the pillars of our bullish view on Asian currencies at the start of the year was the theme of global rebalancing, in which Asian economies would move away from export-dependent growth models towards a more domestic demand-driven model, allowing their currencies to appreciate to dampen their export competitiveness in favour of stronger terms of trade," said Morgan Stanley in a research note.
"However, Asian economies have been slower in the rebalancing process than we had envisioned, as seen by the heavy physical and verbal FX intervention this year."
FATE OF DRAGHI MAGIC
Growing optimism that the euro zone economy may be nearing a bottom has propelled the euro to a 14-1/2-month high against the dollar, a 34-month peak against the yen and 15-month top on sterling.
The ECB is expected to keep interest rates at a record low 0.75 per cent at later on Thursday. Traders will focus on any comments about the euro's recent strength as well as the bank's view on the euro zone economy.
Vassili Serebriakov, strategist at BNP Paribas, said the ECB will likely reason that the euro's strength is due to real improvement in the financial markets and economic outlook, and thus does not warrant immediate action.
"That said, our economists suggest that Mr. Draghi will probably soften the overall tone at the press conference, signaling that easing options are still available if needed," Serebriakov wrote in a client note.
Draghi's strong verbal commitment to defend the euro and the ECB's new bond-buying scheme to help ease funding strains in highly indebted euro zone members had significantly reduced risks of the region crumbling under the weight of its debt woes.
But a corruption scandal in Spain and uncertainty over the outcome of an Italian election later this month brought market focus back to the region's potential political instability.
Later on Thursday, Spain will test investor appetite by offering up to 4.5 billion euros of bonds.
The euro eased 0.1 per cent to US$1.3505 (S$1.67). It hit a 14-1/2-month high against the dollar of $1.3711 last week and a 34-month peak against the yen of 127.71 on Thursday.
The dollar eased 0.2 per cent to 93.45 yen (S$1.24) after touching 94.075 yen, its highest since May 2010 on Wednesday. The euro fell 0.3 per cent at 126.17 yen, off Wednesday's 127.71 yen, its strongest since April 2010.
US crude rose 0.2 per cent to $96.81 a barrel.