Euro slips as German mood sours

German business confidence slipped in June due to concerns over strikes and weak retail sales

FRANKFURT, Germany -- Business confidence in Germany slipped surprisingly this month, pointing to a slower-than-expected recovery in Europe's largest economy and knocking the euro from two-year highs against the U.S. dollar.

The closely watched Ifo business climate index -- based on a monthly survey of about 7,000 west German companies -- fell to 91.3 points in June from a revised 91.6 in May. Economists polled by Reuters had expected the west German index to rise to 91.9 in June.

"This is obviously somewhat disappointing relative to market expectations and I think it is maybe one of the first signs the euroland recovery is not going to be immune to any slowdown we might be getting in the U.S.," Glenn Davies, an economists at Credit Lyonnais, told Reuters.

The Ifo economic research institute said that while companies expressed concern over conditions in the coming months, they were comfortable with the current business climate.

The survey of current business conditions rose to 78.3 from a revised 77.7 in May. The June index reading was the highest since November last year.

However, the expectations index -- a barometer of business views for the next six months -- fell to 104.9 points in June from a revised 106.2 points in the previous month.

"The decline was exclusively due to the no longer quite so favourable expectations for the next six months. However, the view of current trading conditions has improved,'' Ifo President Hans-Werner Sinn said in a statement accompanying the data release.

Ifo said the main June index was pulled lower by the construction sector, which has been hit by strikes, and retail businesses, which have reported weaker sales since the change to euro notes and coins in January.

One bright note, though, was the manufacturing sector where the business mood appears to be improving.

"This is the most important part of the survey, so economy bulls can take comfort in continued manufacturing confidence," investment bank Merrill Lynch said in a research note. "The fact that manufacturing confidence held up in the face of euro strength is a sign of the resilience of manufacturing confidence at the moment."

The Ifo numbers pushed the euro to 97 U.S. cents in early London trading on Tuesday, down from just above 98 cents on Monday -- its highest level in more than two years.

"It [the Ifo survey] was a little bit disappointing but some of the disappointment was mitigated by current conditions which were better," Rob Wayward, senior currency economist at ABN Amro, told Reuters.

Analysts said the euro fell as many traders sold the single currency to take profits from its recent gains against the dollar. The weaker-than-expected Ifo survey provided additional incentive to sell, as did a late rebound in U.S. stocks on Monday.

The drop in German business confidence -- coming at the same time as major strikes, high unemployment and falling inflation -- could convince the European Central Bank to keep interest rates on hold next week.

Economists believe the eurozone's economic recovery remains fragile and could be slowed by a rate hike. The ECB has kept rates on hold since November last year after a series of cuts aimed at reversing the economic downturn.

"We see no reason for the ECB to hike rates in the near term, not before the winter," Gernot Nerb, an economist responsible for the Ifo surveys, told Reuters.

Meanwhile, the Ifo said east Germany's main business climate index rose to 99.9 points in June, down from 99.4 in the previous month.