Euro hits three-month low after German data surprise

By Jamie McGeever

LONDON (Reuters) - Asian shares hit one-year highs on Friday and bond yields were on track to notch up a broad-based rise on the week, but European markets softened after a closely watched measure of German business confidence came in weaker than expected.

The Ifo business climate index fell in May to its lowest this year, following data that showed growth in the first quarter in Germany was its strongest in three years but gave a dimmer outlook for the coming quarters.

This raised expectations that the European Central Bank will ease policy next month, pushing the euro down to a three-month low against the dollar and breaking long-term technical support that had held firm for almost nine months.

"The renewed fall in the Ifo in May suggests that the German recovery may be slowing. We expect annual GDP growth of about 2 percent this year and next, which will not be strong enough to drive a rapid recovery across the euro zone or to eradicate the threat of deflation," said Jennifer McKeown, senior European economist at Capital Economics.

The euro was down a fifth of 1 percent on the day at $1.3630, the lowest in three months and crucially below technical support at the 200-day moving average of $1.3636.

The euro has flirted with that support three times this week but has not closed below it. This could be the first day it has done so since early September last year.

Sovereign credit ratings upgrades on Friday for Spain and Greece had little impact on European markets as their respective economies have been improving for some time.

Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend, and because British and U.S. markets are closed on Monday, which will dry up market liquidity.

"In places like Italy and Greece we don't have properly elected governments, they are just cobbled together, so this weekend's results will play on people's minds," said Marc Ostwald, a strategist at Monument Securities.

In early trading Friday, The FTSEuroFirst 300 index of leading European shares was down 0.1 percent at 1365 points (.FTEU3), Germany's DAX (.GDAXI) was flat at 9719 points and Britain's FTSE 100 (.FTSE) was down 0.2 percent at 6807 points.

SENSE OF RELIEF

Earlier in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was up 0.1 percent at 487.70 after hitting a one-year high of 488.42.

Markets were only mildly distracted by news that Thailand's military had seized power in a bloodless coup late on Thursday, pitching the nation into a further period of uncertainty as the long drawn out political crisis shows no signs of resolution.

The Nikkei (.N225) climbed 0.9 percent as the yen remained on the back foot against the dollar. The Japanese index has gained about 2.7 percent so far this week and poised for its first weekly gain in five.

Over the course of the week, however, investors have broadly regained appetite for risk and pared back bets they have held and profited from over the course of recent weeks.

Investors felt a sense of relief getting through the week without serious market ructions from the crisis in Ukraine, a military coup in Thailand and central bank policy minutes from the U.S. Federal Reserve and Bank of England.

Italian 10-year yields were last up around 17 basis points on the week, bouncing from recent multi-year lows and on track for the biggest weekly rise in a year.

U.S. Treasury debt yields slipped 1 basis point on the day to 2.54 percent but were still up almost 5 basis points on the week following the recent slide to multi-month lows below 2.50 percent.

The dollar traded little changed at 101.77 yen, and has gained about 0.2 percent on the week. Though the rise is modest, it is still poised to snap a four-week losing run versus the yen.

Nickel at the London Metal Exchange (LME) looked set to pocket a 3.5 percent weekly gain, building on the year's stellar advance after a shutdown of Indonesian supply, while copper targeted a flat weekly close following its push to two-month peaks.

(Reporting by Jamie McGeever, additional reporting by John Geddie in London; Editing by Alison Williams)