By Marc Jones
LONDON (Reuters) - The euro reached a five-year peak against the yen and a six-week high against the dollar on Tuesday, as focus intensified on the dwindling level of spare cash in the euro zone's banking system and the ECB's apparent lack of concern.
Stocks consolidated some of their gains of the last two days as caution also ticked-up before the Federal Reserve's meeting next week amid talk of a tentative scaling-back of its stimulus from some of its policymakers.
After a subdued day for Asian stock markets, Germany's DAX (.GDAXI) and France's CAC 40 (.FCHI) and Britain's FTSE 100 (.FTSE) all opened little changed to get the pan-regional FTSEurofirst 300 index (.FTEU3) off to a steady start.
Investors were poised for a busy day of data on some of the countries still struggling in the euro zone, as well as some interesting money market operations at the ECB where liquidity levels are now the tightest in two years.
Slightly weaker-than-expected French industrial production got things off to a shaky start though equivalent data from Italy was better ahead of its final third quarter GDP number later at 1000 GMT.
France's disappointing figures did little to rattle the strong euro, or the region's main bond markets as they continued to add to the minor gains of recent days. (GVD/EUR)
The euro, at $1.3737, was at its highest level since late October versus the dollar and a five-year high of 142.19 yen as anticipation of further moves from Tokyo to boost growth kept the Japanese currency on the back foot.
"It is hard to say the euro will weaken unless the ECB does something," said Laurent Fransolet, an interest rate strategist at Barclays in London.
"The bar for them (to carry out quantitative easing or other types of aggressive easing measures) is quite a bit higher compared to the Fed or Bank of England."
Last week after the ECB kept rates on hold, the bank's head Mario Draghi said he was satisfied with goings-on in the money market and on Monday, one of the bank's other top policymakers Yves Mersch stressed the hurdles to further aggressive easing measures.
One factor that has been driving the euro higher is that, in sharp contrast to the Fed, the ECB's balance sheet has shrunk 8 percent this year as banks have started paying back the 1 trillion euros they took at the peak of the euro crisis.
The amount of excess ECB cash that has long kept bank-to-bank borrowing rates pinned down is now at its lowest level since late 2011.
Analysts will be watching closely to see exactly how tight things have got later when the ECB attempts to get banks to park cash with it to offset its controversial sovereign bond purchases of the past.
Benchmark U.S. Treasury yields were steady at 2.8243 in early European trade and Wall Street was expected to inch higher when it resumes later after the S&P 500 (.SPX) drifted to another record high on Monday.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dipped 0.1 percent, though the session's moves were small as trading was cautious before next week's U.S. Federal Reserve meeting.
The Nikkei stock average (NIK:^9452) gave up 0.3 percent, pulling back from a one-week high as investors booked gains before the year-end, though Japan's benchmark was still on track for its best yearly performance since 1972.
A spate of data released by China late in the session reassured investors worried that the world's second-largest economy might be slowing. Industrial output was slightly shy of market expectations, but retail sales cheered.
"It's hard to see this causing any anxiety to the authorities or causing them to see the need for policy change," Tim Condon, economist at ING in Singapore, said about the Chinese data.
Signs of improvement in the global economy have provided fitful support to riskier assets in recent weeks as markets have been buffeted by uncertainty over the Fed's tapering timeline.
A Reuters poll showed on Monday showed it was still expected to start the process in March, but some economists now say that it might do so as early as this month.
Several Fed officials also lent credence to the idea that a tentative reduction was on the near-term horizon on Monday.
St. Louis Fed President James Bullard said the bank could slightly reduce its monthly bond purchases this month, while Dallas Federal Reserve Bank President Richard Fisher also said tapering should start next week.
On the commodities front, Brent oil was back up to $110 a barrel though U.S. crude edged up to $97.79 per barrel on expectations of a second weekly drop in U.S. crude inventories.
Spot gold hovered to $1,240 an ounce, after gaining over the last two sessions on short-covering, technical selling and some fund-buying.
Copper was steady at $7,137.25 a tonne, near a one-month high as steady consumer buying from China put a floor under prices.
(Additional reporting by Dominic Lau in Tokyo and the China Economics Team; Editing by Shri Navaratnam, Eric Meijer, Chris Gallagher and Alistair Lyon)