LONDON: The euro rose on Friday after a German business sentiment survey beat forecasts, suggesting Europe's largest economy is picking up and lessening prospects of further euro zone monetary easing.
The Ifo business climate index rose to 105.7 in May, well above forecasts for 104.5 as it rebounded after two consecutive falls.
The euro rose 0.3 percent on the day to a session high of $1.29875, close to this week's peak of $1.2998 and the mid-May high of $1.3030.
Recent comments from European Central Bank officials had fuelled expectations the central bank could lower interest rates further, even potentially cutting the deposit rate to negative.
"The euro has rebounded on the back of the Ifo data. There were a lot of expectations that the ECB could do more easing and some positive data surprises have taken the pressure off," said Ian Stannard, head of European FX strategy at Morgan Stanley.
ECB easing prospects contrast with speculation the Federal Reserve may scale back its asset purchasing programme if the US economy improves further. Chairman Ben Bernanke said on Wednesday stimulus could be trimmed in one of the bank's next few policy meetings.
The dollar index, which measures the currency's value against a basket of currencies, was down 0.3 percent at 83.535 , off a three-year high of 84.498 hit on Thursday.
The euro rose 0.3 percent to 132.28 yen, having hit a two-week low of 129.945 yen on Thursday when Japanese shares fell 7.3 percent and helped lift the safe haven currency.
The yen, however, remained slightly firmer on the day against the dollar at 101.87 yen, having hit a two-week peak of 100.83 yen per dollar on Thursday
Although most analysts and traders expect the trend of yen weakness, exacerbated by aggressive Bank of Japan monetary easing in early April, to resume, they say the yen could firm in the coming weeks.
The dollar has gained around 17 percent against the yen this year and the euro is up around 15 percent, allowing room for a further correction. However, traders expect the dollar to find strong support at the 100 yen level.
"You can't have a one-way move forever. So yesterday's big adjustment was necessary, I think. But if the Nikkei rebounds, it will become easier to buy the dollar," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.
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