By Herbert Lash
NEW YORK (Reuters) - The euro dived to a 12-year low against the dollar on Wednesday, driving European stocks higher as shares of the region's big exporters gained, while U.S. equity markets traded mostly flat on 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 programme beginning on Monday and the Fed poised to raise rates possibly as early as June, pushed yields on euro zone bonds lower and those on U.S. government debt initially higher.
The euro extended its decline to below $1.06 for the first time since early 2003 as yields in the euro zone collapsed, falling more than 1 percent. Yields on German 30-year government bonds are now lower than those on U.S. two-year paper.
Expectations that the Fed will end its near-zero rate policy amid a tightening labour 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 euro zone yields helped lift Germany's DAX stock index <.GDAXI>, which includes major exporters Volkswagen and BMW , to a new record. The index has surged 20.6 percent so far this year in a string of new highs.
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Stocks on Wall Street tried to recovered a day after the S&P 500 fell in its biggest one-day drop in two months, after a decline of similar proportions last Friday.
"There's a growing acceptance that the Fed will raise interest rates possibly as soon as June, and people continue to reel in shock as to how far the ECB is likely to remain at zero," said Andrew Wilkinson, chief market analyst at Interactive Brokers Group in Greenwich, Connecticut.
"In the meantime, on the back of a big fall, for stocks it looks like people are regrouping again today," Wilkinson said.
Wall Street edged higher in a see-saw session.
The Dow Jones industrial average rose 21.22 points, or 0.12 percent, to 17,684.16. The S&P 500 added 1.93 points, or 0.09 percent, to 2,046.09 and the Nasdaq Composite gained 2.21 points, or 0.05 percent, to 4,862.00.
In Europe, the broad pan-regional FTSEurofirst 300 index of leading shares closed at 1,574.45, up 1.46 percent to levels last seen in October 2007.
The major stock indexes for Germany <.GDAXI>, France <.FCHI> and Italy <.FTMIB> all rose more than 2 percent.
MSCI's all-country world index , a measure of stock performance in 46 countries, slipped 0.02 percent at it hovered on either side of break-even.
The euro was broadly lower against other major currencies, slumping to a seven-year low against sterling, at 70.145 pence , and a 20-month low against the yen of 127.64 yen .
The euro fell 1.49 percent to $1.0540, tumbling to 1.0512 at one point. The dollar gained 0.31 percent against the yen, to 121.51 yen.
U.S. Treasury debt carrying relatively high yields rose for a third straight day after foreigners bid aggressively during a government auction of $21 billion of benchmark 10-year notes. Treasury prices, which move inveresly to yields, had been lower before the auction.
"That is an indication of the demand for our long-dated paper because we yield so much more than the rest of the world," said Mary Ann Hurley, fixed income trader at D.A. Davidson in Seattle.
Ten-year U.S. Treasuries rose 4/32 in price to yield 2.1103 percent, while two-year Treasuries fell ever so slightly in price, pushing yields up to 0.6882 percent.
The 10-year German bund rose to yield 0.210 percent, after having earlier fallen to a record 0.193 percent. The 30-year German bund yielded 0.663 percent.
U.S. 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.
The front-month contract in U.S. West Texas Intermediate crude settled down 12 cents at $48.17 a barrel.
Brent for April delivery hit a one-month low of $55.92, but settled higher, up $1.15 at $57.54.
(Reporting by Herbert Lash, additional reporting by Michael Connor; Editing by James Dalgleish, Leslie Adler and Chizu Nomiyama)