The euro dived to a 12-year low against the dollar yesterday, driving European stocks higher as shares of the region's big exporters gained, while US equity markets edged higher despite concerns about when the Federal Reserve would begin to raise interest rates.

Divergent central bank policies, with the European Central Bank becoming more accommodative with its bond-buying program beginning on Monday and the Fed poised to raise rates possibly as early as June, pushed yields on eurozone bonds lowers and those on US government debt higher.

The euro extended its decline as yields in the eurozone collapsed, falling more than one per cent, to below $1.06 for the first time since early 2003. Yields on German 30-year government bonds are now lower than those on US two-year paper.

Expectations that the Fed will end its near-zero rate policy amid a tightening labor market propelled the dollar index , which measures the greenback against six major currencies, to almost a 12-year high. On Tuesday, the greenback rose to a 7-1/2-year high against the yen.

The drop in eurozone yields helped lift Germany's DAX stock index, which includes major exporters Volkswagen and BMW, to a record high. The index has surged 20.6 per cent so far this year.

Stocks on Wall Street recovered a day after the S&P 500 had its biggest one-day drop in two months and following a similar fall last Friday. The Dow Jones industrial average rose 43.22 points, or 0.24 per cent, to 17,706.16. The S&P 500 gained 3.07 points, or 0.15 per cent, to 2,047.23, and the Nasdaq Composite added 5.16 points, or 0.11 per cent, to 4,864.96.

In Europe, the broad pan-regional FTSEurofirst 300 index of leading shares closed 1.47 per cent higher at levels last seen in October 2007.

The major stock indexes for Germany, France and Italy all rose more than two per cent.

MSCI's all-country world index, a measure of stock performance in 46 countries, added 0.06 per cent.

The euro was broadly lower against other major currencies, slumping to a seven-year low against sterling, at 70.145 pence, and an 18-month low against the yen, of 128.20 yen .

The euro fell 1.18 per cent to $1.0571, while the dollar gained 0.26 per cent against the yen, to 121.45 yen.

Ten-year US Treasuries fell 4/32 in price to yield 2.1438 per cent, while two-year Treasuries fell slightly in price, pushing yields up to 0.7002 per cent.

The 10-year German bund rose to yield 0.210 per cent, after having earlier fallen to a record 0.193 per cent. The 30-year German bund yielded 0.663 per cent.

US crude oil prices hit a one-month low after government data showed an oil inventory build in the United States last week, contrary to expectations by some traders for a draw.

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