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Thursday November 23, 2006 - 11:42:33 GMT
Reuters - www.reuters.com

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FOREX-Ifo sparks dlr sell off, euro hits 5-1/2 mth high

FOREX-Ifo sparks dlr sell off, euro hits 5-1/2 mth high
Thu Nov 23, 2006 6:34am ET14

(Changes dateline, updates prices)

By Toni Vorobyova

LONDON, Nov 23 (Reuters) - The euro hit a 5-1/2-month high against the dollar for a second day on Thursday, propelled by a strong German business sentiment reading, in trade thinned by public holidays in the United States and Japan.

The Ifo business climate index unexpectedly rose to 106.8 in November from 105.3 the previous month, far outstripping forecasts for a fall to 105.2.

The data sparked buying in euro/dollar, which in turn led to a broad selling of the U.S. currency, sending it to 5-1/2 month troughs against a basket of currencies <=USD>.

The dollar had already come under heavy selling pressure on Wednesday as investors rushed to cut back on risky positions before the holidays.

"It's very thin trading today. Euro/dollar is higher after the Ifo, but basically it's just a continuation from yesterday, with dollar weakness continuing," said Geoff Kendrick, currency strategist at Westpac.

The euro hit a 5-1/2 month high at $1.2975, before paring gains to trade at $1.2956 at 1114 GMT , up 0.2 percent on the day. Above $1.2979 would take the euro to a 1-1/2 year high.

Against a basket of currencies, the greenback fell to its weakest since early June at 84.36 <=USD>.

CARRY TRADES UNWIND?

The dollar also weakened against low-yielding currencies, falling to a 2-month low of 116.22 yen and a 3-month trough at 1.2224 Swiss francs .

The euro also weakened against the yen, to 150.73 yen , and hit a 7-week low against the Swiss franc at 1.5852 francs .

Some said the move suggested investors were losing their appetite for carry trades -- borrowing low-yielding currencies cheaply to invest in countries with higher interest rates.

But Kendrick said the dollar would need to fall to around 113 yen or 1.2000 Swiss francs to confirm such a view.

"It's difficult to say whether it's the start of a carry trade unwind ... the scale as yet is not enough to lead to that conclusion," he said.

The strong German Ifo strengthened expectations that the European Central Bank could continue hiking rates next year, after a widely expected move to 3.5 percent next month.

"It's all good news for the German economy this morning, with the main activity index looking a lot stronger than expected," said Audrey Childe-Freeman, European economist at CIBC World Markets.

"This suggests the outlook remains robust, which is reassuring in contrast to the mounting question marks that seem to be settling in the market with regard to the U.S. growth outlook."

German exporters can live with the euro at current levels around $1.30 but would suffer if it climbed above $1.35, Ifo Institute economist Gernot Nerb said on Thursday.

With the United States shut for Thanksgiving, there are no U.S. data or policymaker speeches later in the day to give market direction.

© Reuters 2006. All Rights Reserved.

 

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