The euro hit an 11-month high against the dollar and European shares rose on Monday as fading prospects of further monetary easing in the region and an improving growth outlook bolstered demand.
The common currency peaked at $1.3404, its highest level since February 2012, producing a hefty 2.5 percent gain since European Central Bank President Mario Draghi gave a more optimistic outlook for the euro zone late last week.
Europe's FTSE Eurofirst 300 index of top companies added 0.25 percent to be just shy of a two year high, while London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 all traded around 0.2-0.8 percent higher.
"There are small positive signs coming from the euro zone which Draghi pointed at, and this caught the market," said Richard Falkenhall, currency strategist at SEB.
The moves came despite disappointing euro zone industrial output data for November which showed a 0.3 percent month-on-month drop against expectations of a slight rise.
Before the data 10-year German government bond yields , a barometer of investors' views on the euro zone outlook, reflected a more cautious mood by easing 3.7 basis points at 1.56 percent.
Traders said a busy week for euro zone government debt issuance, led by Germany's sale of up to 5 billion euros of 10-year bonds on Wednesday, could be prompting the fall in yields.
The gains in European share markets mirrored a worldwide rally after data from the United States and China signaled that the easier monetary polices of major central banks are beginning to take effect.
The MSCI world equity index was up 0.2 percent to trade near an 18-month high on Monday. The dollar's value against a basket of major currencies fell to its lowest level since the beginning of the year.
Chicago Federal Reserve chief Charles Evans, a voting member of the Fed's policymaking committee this year, added to the better sentiment by forecasting the U.S. economy would grow 2.5 percent in 2013 and 3.5 percent in 2014.
Evans said markets can be confident the U.S. central bank would take action to boost the recovery without letting inflation take hold, although he did not refer to any further Fed easing.
Analysts expect data due this week, including on U.S. inflation and retail sales and China's fourth quarter GDP, to show further momentum in the world's two biggest economies.
Meanwhile the Japanese yen continued sinking against other major currencies, touching a fresh a 2-1/2-year low of 89.67 yen on expectations of aggressive monetary easing in Japan.
New Prime Minister Shinzo Abe reiterated on Sunday his calls for the Bank of Japan (BOJ) to set a 2 percent inflation target and pursue bolder monetary easing to end nearly two decades of deflation.
Abe, who plans huge budget stimulus for the Japanese economy, also said he wanted to appoint a new head of the central bank who shares his views when the term of Governor Masaaki Shirakawa ends in April.
"The confirmation that there's going to be a push for a new governor, that new governor is going to have a mandate of 2 percent inflation - that plus the fiscal stimulus is a major negative for the yen," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
Tokyo markets were closed on Monday for a holiday but MSCI's broadest index of Asia-Pacific shares outside Japan rose a modest 0.3 percent on the statement, remaining near a 17-month peak set on Friday.
The growing optimism about the world's biggest economies helped commodity prices to recover from last week's decline. Oil also benefited from a resurfacing of fears about a disruption of supply from the Middle East.
A cut in Saudi Arabian production last month, pipeline sabotage in Yemen and a weather-related drop in Iraqi shipments have reduced output, while fighting in Syria and Iranian naval exercises in the Strait of Hormuz reminded investors of the risk of wider disruption to Middle East supply.
Brent crude gained 60 cents to $111.24 a barrel, while U.S. crude rose 49 cents to $94.05 a barrel.
Copper edged up 0.4 percent to $8,077 a tonne and gold was up 0.3 percent at $1,667.45 an ounce.