LONDON The dollar hovered near a four-year high against the yen and a rally in world shares slowed on Thursday though markets remain buoyed by Japan's aggressive monetary easing and signs of a recovery in China.
News that the U.S. Federal Reserve may scale back its massive bond purchases later this year has failed to dampen sentiment in share markets that saw the S&P 500 share index .SPX hit a record high on Wednesday; the Fed outlook has, however, also supported the dollar
"No doubt the new all-time highs seen in the S&P 500 will attract new retail money into the market. There's nothing like being under-invested and seeing the word ‘new highs' on the front page of each newspaper," IG Chief Market Strategist Chris Weston wrote.
Data on Thursday showed Chinese banks made 1.06 trillion yuan ($171.2 billion) of new local currency loans in March, adding to evidence of an economic recovery being fuelled by credit. The numbers followed Wednesday's trade figures, which signaled a recovery in domestic demand.
The fresh loans number "shows that there is ample funding in the Chinese economy to support growth and is positive for sentiment", said Dariusz Kowalczyk, senior economist for ex-Japan Asia at Credit Agricole CIB in Hong Kong.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.8 percent after the data, helping lift the world equity index .MIWD00000PUS 0.25 percent, a day after posted its second best gain of the year.
European shares steadied near one-week highs after posting their biggest daily rise in three months on Wednesday, with the FTSE Eurofirst 300 .FTEU3 index little changed in early trade.
The dollar rose as high as 99.88 yen in the currency markets, staying just below the key 100 yen level as traders await the expiration of large options contracts which have generated demand from banks to buy the yen and sell dollars.
Once these expire the dollar is expected to make a decisive break higher having already gained more than 7 percent on the yen since the BoJ last week unveiled a radical stimulus program that even eclipsed the Fed's own massive plan.
In the debt market German bond futures were slightly lower before an Italian bond auction which is expected to see good demand from investors hunting for better yields.
Italy, which is still in search of a new government after February's inconclusive elections, will offer 5.5-7.5 billion euros of a new three-year bond, a 15-year bond and a five-year floating rate note later on Thursday.
Gold bounced on Thursday from its weakest level in almost a week as rising tension on the Korean peninsula stirred some safe-haven buying in Asia, though gains are likely to be capped by uncertainty over the Federal Reserve's stimulus program.
Heavy outflows from gold exchange-traded funds also weighed on the metal, in addition to the rally in world stock markets and Cyprus's plan to sell excess bullion reserves to help finance its part of its bailout. <GOL/ETF>
Gold hit its lowest since April 5 at $1,553.10 an ounce at one point before settling around $1,557.50, down 1.75 percent.
(Reporting by Richard Hubbard. Editing by Alastair Macdonald)