By Richard Hubbard
LONDON, Nov 27 (Reuters) - The euro touched a four-year high against the yen on Wednesday and European stocks rose after a deal was struck to form a new German government and more talk emerged of European Central Bank help for struggling firms.
The single currency reached a peak of 138.16 yen, its best level since October 2009 and hit a near one-month high against the dollar of $1.3600.
The approach of Thursday's Thanksgiving holiday in the United States and next week's European Central Bank policy meeting and U.S. payrolls report kept a lid on gains, however.
'It's pretty much a nose-bleed area where we are now,' said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge who said there were technical barriers at around 138.50 yen that were also capping the euro's rise.
Europe's main share markets all edged higher after the long awaited coalition agreement between German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats.
Details of the deal were still scant but it included an agreement to raise the minimum wage and increase pensions, which should help boost activity in Europe's largest economy.
'I think the political pendulum is moving slightly towards the left, which means stronger domestic demand in Germany,' said Eric Chaney, chief economist of AXA Group.
'But that also implies higher labour costs and that means Germany will, at the margins, be less competitive.'
The German DAX was up 0.2 percent at 9,311.29 points in early trade, closing on its record high of 9,323.44 points hit earlier this week. The pan-European FTSEurofirst 300 index gained 0.25 percent.
'Germany is getting a more domestically focused economy. It's not happening overnight but this could be one element of appeal for equity investors,' said Gerhard Schwarz, head of equity strategy at Baader Bank.
Positive investor sentiment is also being supported by expectations the ECB will take fresh measures to support the struggling euro zone economy at next week's policy meeting.
German newspaper Sueddeutsche Zeitung reported on Wednesday that the euro zone central bank was considering a new long-term liquidity operation which would be available only to banks that agree to use the funding to lend to businesses.
A survey showing German consumer sentiment at a six-year high added to the positive tone.
The debt market showed little reaction to the developments, however, with traders more interested in an auction of 4 billion euros of new 10-year Bunds.
German Bund futures slipped 5 ticks to 141.65 and the 10-year cash yield was flat at 1.69 percent.
Outside Europe, a step up in tensions over Beijing's demands that airlines inform it when flying over disputed islands in the East China Sea, a move the White House termed 'unnecessarily inflammatory', was worrying some investors.
Tensions rose after the United States flew two unarmed B-52 bombers over the islands, while ANA and Japan Airlines stopped sending Chinese authorities their flight plans for routes that pass through the zone.
'It is bubbling away under the surface. In an environment where there's not a lot of data, then keeping one eye on geopolitics is probably going to be a good idea as well, because you never know what might come of that,' said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.
MSCI's broadest index of Asia-Pacific shares outside Japan ended up 0.1 percent though shares in Japan weakened by 0.4 percent to inch further away from the six-month peak touched on Monday.
In commodities, Brent crude was capped around $111 a barrel after oil industry group American Petroleum Institute (API) reported a 6.9 million barrel rise in crude oil inventories, far higher than the 600,000-barrel build anticipated by analysts.
Investors have also concluded that a deal between Iran and world powers, which had caused a sharp fall in oil prices, will not bring an immediate increase in crude supplies.
(Editing by Catherine Evans) Keywords: MARKETS GLOBAL/
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