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 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 euro zone bonds lowers and those on U.S. government debt higher.
The euro extended its decline as yields in the euro zone collapsed, falling more than 1 percent, to below $1.06 for the first time since early 2003. 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 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.
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The drop in euro zone 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 percent 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.
"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.
The Dow Jones industrial average rose 43.22 points, or 0.24 percent, to 17,706.16. The S&P 500 gained 3.07 points, or 0.15 percent, to 2,047.23, and the Nasdaq Composite added 5.16 points, or 0.11 percent, to 4,864.96.
In Europe, the broad pan-regional FTSEurofirst 300 index of leading shares closed 1.47 percent higher at levels last seen in October 2007.
The major stock indexes for Germany, France and Italy all rose more than 2 percent.
MSCI's all-country world index, a measure of stock performance in 46 countries, added 0.06 percent.
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 percent to $1.0571, while the dollar gained 0.26 percent against the yen, to 121.45 yen.
Ten-year U.S. Treasuries fell 4/32 in price to yield 2.1438 percent, while two-year Treasuries fell slightly in price, pushing yields up to 0.7002 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 was down 67 cents at $47.62 a barrel.
Brent for April delivery hit a one-month low of $55.92 and last traded up 64 cents at $56.03.
(Reporting by Herbert Lash; Editing by James Dalgleish and Leslie Adler)
