(Changes byline, updates prices, adds quotes)
By Simon Falush
LONDON, May 15 (Reuters) - The euro strengthened on Thursday
after Germany reported its strongest quarterly growth in 12
years but gains were muted as investors focused on likely slower
growth ahead.
German gross domestic product expanded by 1.5 percent
quarter-on-quarter in January-March, far exceeding forecasts
and highlighting how much Germany has been buttressing the
overall euro zone economy [].
Along with a stronger-than-expected reading of French GDP
growth, this helped the overall euro zone GDP figure for May
increase by a stronger-than-expected 0.7 percent for the quarter
[].
However, the euro pared gains as some investors had expected
an even stronger euro zone figure after the German gains came in
so high.
"The German number really knocked the ball out of the park
and given the sheer scale of the increase it's surprising there
was not a bigger kick for the overall euro zone number," said
Jeremy Stretch, strategist at Rabobank.
At the same time, figures showed that annual inflation in
the euro zone was 3.3 percent in April, below March's record 3.6
percent, suggesting the possibility that inflation pressures may
have peaked.
While the regional economy remains on firm ground for now,
the Munich-based Ifo research institute's euro region economic
climate index worsened to a five-year low in the second quarter,
suggesting a slowing economy in coming months[].
"The outlook from here is fairly negative and the lagged
effects of slowing growth in the U.S. and the credit crunch are
likely to be felt in the euro zone," said Jeremy Stretch,
strategist at Rabobank.
The euro climbed as high as $1.5547 <EUR=> after the German
data but pared gains to trade up 0.1 percent at $1.5495 by 1111
GMT as investors proved underwhelmed by the euro zone-wide data.
Sterling pulled away from a near three-month low against the
dollar after UK Prime Minister Gordon Brown said that he hoped
the Bank of England could cut interest rates, a move seen
helping the ailing UK economy. (For details please double click
on []).
Sterling was steady at $1.9453 <GBP=>, recovering from the
day's low and off the low of $1.9363 since late February hit on
Wednesday.
The dollar was little changed at 104.95 yen <JPY=>.
ECB ON HOLD
Growth in the euro zone through April has vindicated the
European Central Bank's decision to hold interest rates at 4
percent despite nagging inflation risks, analysts said.
"A lot of the people were concerned that the ECB may be
worried about an inflation problem that was not as bad as
expected. But to be quite honest, the ECB has been right and the
market has been wrong," said Steve Barrow, chief currency
strategist at Bear Stearns.
The euro has retreated from a record high against the dollar
hit last month on expectations that a slowdown in regional
growth would require the ECB to cut rates some time this year.
Analysts were cautious in getting too optimistic about
Thursday's figures, and some see much harder times ahead for the
euro zone as the region's economy feels the pinch of an ongoing
global slowdown.
"Looking ahead, we think that no euro-area country will be
immune to the downturn," said analysts at Lehman Brothers in a
research note. "We thus expect signs of a substantial cooling of
activity growth to come through in the Q2 GDP data."
The dollar has been supported by market expectations for the
Federal Reserve to pause lowering U.S. interest rates and to
start raising them later in the year as the central bank focuses
on the threat from inflationary pressures. <FEDWATCH>
San Francisco Fed President Janet Yellen said on Wednesday
that rates had "come way down" in recent months, and with
inflation looming the central bank's key lending rate had
probably been cut enough for now despite risks to growth
[].
Investors will eye U.S. jobless and manufacturing data at
1230 GMT for further clues on the prospects for monetary policy.
(Additional reporting by Naomi Tajitsu)
(Editing by David Christian-Edwards)
