Euro hits three-month low after German data surprise

Fri May 23, 2014 4:43am EDT
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By Jamie McGeever

LONDON (Reuters) - Asian shares hit one-year highs on Friday and bond yields were on track to notch up a broad-based rise on the week, but European markets softened after a closely watched measure of German business confidence came in weaker than expected.

The Ifo business climate index fell in May to its lowest this year, following data that showed growth in the first quarter in Germany was its strongest in three years but gave a dimmer outlook for the coming quarters.

This raised expectations that the European Central Bank will ease policy next month, pushing the euro down to a three-month low against the dollar and breaking long-term technical support that had held firm for almost nine months.

"The renewed fall in the Ifo in May suggests that the German recovery may be slowing. We expect annual GDP growth of about 2 percent this year and next, which will not be strong enough to drive a rapid recovery across the euro zone or to eradicate the threat of deflation," said Jennifer McKeown, senior European economist at Capital Economics.

The euro was down a fifth of 1 percent on the day at $1.3630, the lowest in three months and crucially below technical support at the 200-day moving average of $1.3636.

The euro has flirted with that support three times this week but has not closed below it. This could be the first day it has done so since early September last year.

Sovereign credit ratings upgrades on Friday for Spain and Greece had little impact on European markets as their respective economies have been improving for some time.

Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend, and because British and U.S. markets are closed on Monday, which will dry up market liquidity.   Continued...

A man looks at an electronic board displaying Japan's Nikkei average (top C) and various countries' stock indices, as passers-by walk past outside a brokerage in Tokyo April 16, 2014. REUTERS/Toru Hanai