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Tuesday August 26, 2008 - 10:47:33 GMT
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FOREX NEWS-Dollar surges as euro thumped by weak Ifo data

Tue Aug 26, 2008 5:21am EDT

* Dollar rises to 6-month high vs euro at $1.4597 <EUR=>

* Below forecast Ifo data prompts sharp euro sell-off

* Sterling slides to 2-yr low vs dollar

* High yielders slide on increased risk aversion

By Simon Falush

LONDON, Aug 26 (Reuters) - The dollar surged broadly on Tuesday, hitting a six-month high against the euro as the single currency tumbled after weak German data highlighted frailty in the euro zone economy, fuelling more speculation of a possible interest rate cut.

The dollar hit its highest this year against a basket of currencies as a surprisingly weak reading in the Ifo business climate index added to the view that Europe's economy is in severe slowdown mode and could well enter a technical recession.

The German business climate index in August fell to 94.8 from 97.5 in July, much softer than the slight dip to 97.1 economists had expected.

Earlier, data had shown that German GDP contracted in the second quarter for the first time since 2004, while German consumer sentiment worsened more than expected, hitting a five-year low and also stoking fears about the health of the German economy. [ID:nLQ127223].

"The numbers out of Germany have been softer and it underlines the downside risk to euro zone activity, meaning the euro is under more pressure as the ECB may have to respond by cutting rates," said Daragh Maher, deputy head of global foreign exchange research at Calyon.

The euro fell over a cent following the Ifo data to a six-month low of $1.4597, by 0904 GMT <EUR=> while the dollar index rose to the year's high of 77.501, as other currencies tracked the euro lower.

The euro is down more than 6 percent this month - and looking set for the biggest monthly fall since its 1999 launch. The dollar was up 0.5 percent at 109.89 yen <JPY=>.

European equity indexes tracked Asian markets lower after U.S. financial sector troubles including a ninth bank failure intensified jitters on the financial sector with the MSCI World Equity Index .MIWD00000PUS, falling to its lowest since September 2006.

This prompted investors to bail out of risky trades in the high-yielding Australian dollar, which fell to a seven-month low against the greenback, while the New Zealand dollar fell around 1.7 percent.

High-yielding currencies suffer when risk aversion increases as investors exit relatively risky carry trades where they borrow low-yielding currencies to fund purchases of these assets.

"Problems in the U.S. financial market are leading to equity market weakness which is the principal driver hitting the high-yielding currencies," said Maher at Calyon.

"The dollar is well-supported now, while commodity prices are falling, meaning there's quite a lot of downside possible for currrencies like the aussie."

The kiwi dollar was down 1.8 percent at $0.6918 <NZD=>, dented by New Zealand posting its highest monthly trade deficit in 11 months in July, while the Australian dollar had fallen as low as $0.8527, its lowest in seven months <AUD=>.


The pound fell to its lowest in over two years against the dollar to trade as low as $1.8369 <GBP=> and matched a 12-year low on a trade-weighted basis set the previous session <=GBP>.

Data last week showed British economic growth stalling in the second quarter, stoking expectations for the Bank of England to trim interest rates.

The pound was also dented by a survey showing optimism in Britain's dominant service sector deteriorated sharply in the three months to August. [ID:nLM709515]

Investors will wait to see how the U.S. economy is faring when new home sales data for July and a consumer confidence survey for August are released later in the day.

(Reporting by Simon Falush; editing by Stephen Nisbet)

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