The euro posted a record high versus the yen and climbed against the dollar on Wednesday after an upbeat survey of German business sentiment the previous session stoked expectations for higher euro zone interest rates in early 2007.
Germany's Ifo survey jumped in December to a 15-year high, showing the euro zone's largest economy is on a strong footing going into the new year and raising the prospect of the European Central Bank lifting rates further from 3.5 percent. Investors will look for any clues on the rate outlook from ECB President Jean-Claude Trichet, who is due to testify before the European Parliament in Brussels at 0830 GMT.
"Given the direction the ECB's monetary policy is seen heading now, the euro is on an upward trend," said Masaki Fukui, senior market economist at Mizuho Corporate Bank.
The euro and sterling have been the big winners this year among major currencies on the back of rising rates and seem set to extend their rally into the new year, with the Federal Reserve holding rates at 5.25 percent. The yen suffered across the board, hitting eight-year lows against sterling, as Bank of Japan Governor Toshihiko Fukui tempered expectations for a rate increase in January by sounding a cautious note on consumer spending and prices.
"The interest rate differentials remain, and people are disappointed the BOJ may not hike rates soon," said Hidenori Kato, head of FX sales and trading at Societe Generale in Tokyo.