Euro recovers from eight-month low on upbeat euro zone business surveys

[July 24, 2014]  LONDON (Reuters) - The euro climbed from an eight-month low on Thursday after German and French business surveys beat expectations, although the risks to the euro zone economy from any tougher sanctions on Russia curbed gains.

The French composite purchasing managers index of both the manufacturing and services sector rose to 49.4 from 48.1 in June, bringing activity closer to the 50-point line dividing growth from contraction.

German business activity also expanded in July as the services sector grew at the fastest rate in three years. But concerns that economic activity in Germany, which has strong trade links with Russia, could stumble in coming months as sanctions begin to bite were keeping many away from the euro.

The sanctions are likely to weigh on a fragile recovery and keep alive expectations of even looser monetary policy from the European Central Bank. Euro zone interest rates were slashed in June and the ECB has left open the possibility of further monetary loosening - possibly through quantitative easing.

The euro hit a day's high of $1.34855 <EUR=> after the euro zone "flash" composite survey was released, showing the index at a three-month high in July. The euro had fallen to an eight-month low of $1.3438 in early London trade.

The euro was also 0.2 percent higher against the yen at 136.93 yen and rose against the pound to 79.20 pence, having slumped to a 23-month low on Wednesday.

"The activity data offsets some of the weakness we saw last month and that has helped the euro," said Geoff Yu, currency strategist at UBS. "But there are concerns about domestic growth in the euro zone and possible sanctions on Russia are likely to have an impact."

The euro has also struggled to find support amid persistent expectations for further monetary easing in the euro zone and a gradual widening of interest rates favoring the U.S. over Europe.

KIWI SLUMPS

The biggest mover though was the New Zealand dollar. It skidded to a six-week low after the country's central bank switched to a wait-and-see stance following its fourth straight rate hike and Governor Graeme Wheeler warned against a strong currency.

The kiwi fell to $0.8568, a level not seen since June 12, and was last trading at $0.8592, down 1.3 percent.

The Reserve Bank of New Zealand (RBNZ) raised its cash rate by 25 basis points to 3.5 percent early on Thursday but pushed the pause button, saying the economy appeared to be responding to higher rates as intended.

The move was not a complete surprise given many have been questioning the need for more tightening in the face of a high currency, restrained inflation and falling prices for dairy, the country's biggest export earner.

Yet the reaction in the kiwi was swift with investors knocking the currency down sharply.

"Perhaps the main surprise was the language regarding the high exchange rate. 'There is potential for a significant fall' opens to interpretation as a veiled intervention threat," said Imre Speizer, senior strategist at Westpac in Auckland.

Analysts at Citi said it is unusual for a central banker to make such blunt comments about the currency and showed a high level of frustration with the strong kiwi.

(Additional reporting by Shinichi Saoshiro; Editing by Catherine Evans/Ruth Pitchford)

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