* Euro surges, rallies to 2-1/2 month high vs dlr
* Euro hits record high vs sterling above 95 pence
* German Ifo index falls more than expected
* Markets keep eye on yen; await BOJ rate decision
(Adds quotes, updates prices)
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.
The euro is set for its best weekly performance ever against
the dollar, after the U.S. Federal Reserve cut benchmark
interest rates to a historic low near zero on Tuesday.
In contrast, the European Central Bank seems more cautious
about drastically reducing rates, where key rates now stand at
2.5 percent.
In thin volatile trade, the euro surged to a 2-1/2 month
high against the dollar at $1.4719. By 1303 GMT, it was up 1.5
percent on the day at $1.4625.
The single currency also hit a fresh record-high above 95
pence <EURGBP=> and is also on track for its best week and month
ever against the pound.
"The rise in euro/sterling is relentless, pushing the pair
up toward parity," said Christian Lawrence, currency strategist
at RBC Capital Markets in London.
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 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 support that view, moving sharply in the euro's
favour.
Sterling was on the defensive as speculation that UK
interest rates could fall sharply was fuelled by Bank of England
Deputy Governor Charles Bean saying UK interest rates could fall
to zero. [].
Minutes from the BoE's 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.
EYES ON MOF AND BOJ
The dollar also fell broadly, down one percent against a
basket of currencies to 77.780, its weakest in more than two
months <.DXY> and on track for its worst week and month ever.
But the greenback rose one percent against the yen to 88.25
yen as Japanese authorities stepped up their rhetoric against a
stronger yen after dropping to its lowest in more than 13 years
near 87.11 yen. []
"You want to keep an eye on the yen with the ... 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 there was massive yen-selling against the
euro after Japanese Finance Minister Shoichi Nakagawa said
currency internvention was an option open to authorities.
[]
Central bank bids were seen in euro/yen, but not related to
currency intervention, traders said.
The Fed's rate cut has also raised pressure on the Bank of
Japan to ease policy 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 benchmark rates from the
current 0.3 percent. []
(Additional reporting by Veronica Brown, editing by Mike
Peacock)
