Honda Motor posted a surprise rise in first-quarter operating profit on Wednesday as it weathered a drop in North American sales, and it raised full-year forecasts thanks to a stronger-than-expected dollar, according to Reuters.

Robust sales in Europe and Asia, plus a strong performance by its all-terrain vehicles in the US market and motorcycles in Asia, helped Japan's third-largest auto maker report considerably better results than many analysts had expected, the report said.

"Honda's earnings seemed stronger than expected and proved that the company is now able to generate bigger profits outside the U.S. and Japan," Takahiro Nakayama, a fund manager at Citigroup Asset Management, told Reuters.

For the year to March, Honda - overtaken last year by Nissan Motor as Japan's number two car maker - raised its operating profit forecast by 20 billion yen to 580 billion yen ($5.23 billion), which would be down 3.4% from last year, the report added.

"This is mainly a reflection of our strong first-quarter results and partly due to currency rates," executive vice president Koichi Amemiya reportedly told a news conference.

Although first-quarter earnings were hit by a 9 yen fall in the dollar's average value to 110 yen from the year before, the exchange rate was more favourable than its 105 yen assumption for the full 12-month period, Reuters said, adding that Honda now expects the dollar to average 107 yen this year and some analysts said the forecasts still looked conservative.

"Their sales volume forecasts, which were not revised up despite some strong results in areas like motorcycles, as well as their currency assumptions, are looking conservative," Koji Endo, auto analyst at Credit Suisse First Boston, told the news agency.

Reuters said operating profit for April-June came in at 159.99 billion yen ($1.44 billion), up 0.3% from the year-earlier period, while net profit grew 12% to 114.26 billion yen, lifted by profits from China - sales rose 3.2% to 2.073 trillion yen.

In the key North American market, however, a drop in Canadian sales weighed and, although US vehicle sales rose, profits were pressured by a hefty increase in sales incentives to an average $840 per vehicle from around $250 in the same period last year, Reuters said.

Due to a dearth of new, high-margin models in the United States until later this year, analysts reportedly expect Honda to lag its domestic rivals.

Honda's US retail sales in the year to date are up 1.9%, better than a slight fall at General Motors and a 4.3% decline at Ford, Reuters noted.

The report said Detroit's "Big Three" are increasing incentives but Honda said its spending would fall to around $450 this quarter after its inventories were adjusted to sufficient levels.

At home, Honda has outperformed most rivals thanks to a string of product launches in the popular minivan segment, but analysts reportedly note sales still lack the pace needed to reach its 800,000-unit target in Japan this calendar year.

Honda's domestic sales for January-June totalled 370,056 units, down 0.8% from the year before, Reuters said.

The news agency said Honda will look to offset any shortfall at home and in the US with robust growth in China, where its main plant doubled capacity this year, and in Europe, where it will add more diesel-powered cars to its line-up.