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Thursday December 18, 2008 - 11:54:37 GMT
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FOREX NEWS-Euro surges broadly, hits 2-1/2 mth high vs dlr

Thu Dec 18, 2008 6:49am EST

* Euro surges broadly, rallies to 2-1/2 month high vs dlr

* Euro hits record high vs sterling above 95 pence <EURGBP=>

* German Ifo index falls more than expected

* Markets keep eye on yen; await BOJ rate decision

(Releads, adds quotes)

By Tamawa Desai

LONDON, Dec 18 (Reuters) - The euro surged across the board on Thursday, buoyed by expectations that euro zone interest rates will not fall as steeply as those in other major economies despite data pointing to worsening German business sentiment.

In thin volatile trade, the euro surged to a 2-1/2 month high against the dollar at $1.4719. By 1105 GMT, it was up 1.5 percent on the day at $1.4620 <EUR=>.

The single currency also hit a fresh record high against sterling at 95.04 pence <EURGBP=>, according to Reuters data.

Against the yen, the euro was up 2.5 percent at 128.96, after hitting a session high of 131.04 yen <EURJPY=> as Japan's finance minister said currency intervention was an option available to authorities [ID:nTKF003218].

The euro has been on an upswing since the U.S. Federal Reserve cut rates -- a benchmark for the return on holding dollars -- to a historic low near zero on Tuesday and said it would take "all available tools" to help its economy.

Meanwhile, speculation that UK interest rates could fall sharply were fuelled by Bank of England Deputy Governor Charles Bean, who said UK interest rates could fall to zero [ID:nLI564412].

Minutes from the Dec. 3-4 rate-setting meeting showed policymakers had discussed cutting by a larger margin than the 100 basis point easing that took benchmark rates to 2 percent.

That contrasts with recent comments by European Central Bank members, who seem to be cautious about drastically reducing rates, where key rates now stand at 2.5 percent.

"The euro is picking up quite a lot of support -- the yield differentials have moved out and that may well be providing some support," said Ian Stannard, senior currency strategist at BNP Paribas.

Rate spreads between the euro zone and other countries have widened sharply in recent days, reflecting expectations for interest rate differentials to widen.

The implied euribor/short sterling rate spread widened as much as 15 basis points to 75 basis points, compared with around zero at the start of the month.

The euro's rise accelerated despite a weaker-than-expected reading of the Ifo institute's index on German business sentiment. The headline index fell to 82.6 in December from 85.8 in November, below expectations of 84.0.

"The Ifo confirms continued deterioration in the German economy but what is worrying is the pace of decline," said Audrey Childe-Freeman at Brown Brothers Harriman in London.

Still, "the ECB is reluctant to bring interest rates to zero and wants to wait in January, after cutting rates sharply in the past few months," she said.

Earlier this week, ECB President Jean-Claude Trichet said he was focused on ways to ensure its 175 basis points of rate cuts since early October were passed on to the real economy.

EYES ON BOJ AND MOF

The dollar <JPY=> rose 0.8 percent to 87.99 yen, but remained trapped near 87.11, the lowest in more than 13 years.

Recent comments by Japanese officials have kept speculation intact that authorities may intervene to rein in the currency's rise [ID:nT205941].

"You want to keep an eye on the yen with the MOF and finance ministry comments earlier in the day - that might be a catalyst to watch for euro/yen," said Jeremy Stretch, markets strategist at Rabobank in London.

"Alternatively it could be a presumption that people are nervous and that is exacerbating volatility."

Other traders said central bank bids were seen in euro/yen, but not related to currency intervention.

The Fed's rate cut has raised pressure on the Bank of Japan to cut rates at a two-day meeting that ends on Friday.

Two-thirds of economists polled by Reuters this week expect the Japanese central bank to cut rates from the current 0.3 percent [ID:nT238594]. (Additional reporting by Naomi Tajitsu; editing by Patrick Graham)

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