LONDON (AFP) — The euro rallied against the dollar on Tuesday, lifted by an improving outlook for the German economy, Europe's biggest, despite troubling news from the US property market, analysts said.
In London trade, the European single currency rose to 1.3601 dollars from 1.3558 dollars late on Monday in New York. It was also up against the Japanese yen at 130.95 yen compared to 130.57 previously.
The dollar instead fell to 96.24 yen from 96.31 yen late on Monday.
Hopes rose on Tuesday that the worst could be over for Germany's economy as a closely-watched index measuring the confidence of financial market players rose to a near three-year high in May, its seventh consecutive monthly gain.
The ZEW index rose 18.1 points from April to 31.1 points in May -- its highest reading since June 2006.
"The euro edged higher following the release as the market took comfort from the stronger-than-expected rebound in expectations," said Frederik Ducrozet, an economist with French bank Credit Agricole.
The euro is generally considered a risky bet on currency markets and therefore gains at times when there is greater perceived economic stability, while the dollar and the yen are seen as safe havens in troubled times.
Analysts at Germany's Commerzbank said reports that US banks were getting ready to repay their state aid packages would also increase "risk appetites on the global financial markets," thereby further boosting the euro.
"May's increase in the German ZEW index confirms that investors expect economic conditions to improve, but only from an extremely weak starting point," said Jennifer McKeown at Capital Economics in London.
That positive economic news was balanced out however by US government data showing US housing construction starts and permits slumped to fresh lows in April although there was a rebound in the key single-family home sector.
The number of construction permits on new US homes and apartments fell 3.3 percent from March to an annual rate of 494,000, the Commerce Department said.
The pace was the weakest since the data began to be tracked in 1960 and eclipsed the prior record slump in March of a revised 511,000 permits.
The April lurch lower surprised most analysts, who had expected the forward-looking indicator on construction permits to increase to 530,000.
The building permits number takes the pulse of the housing market, which fell off a cliff two years ago and has been deteriorating amid a severe recession and tight credit.
Also tempering the optimism was a separate indicator showing that investors' assessment of the current economic climate in Germany had dipped slightly and stood at its lowest level since July 2003.
Financial markets have mostly shaken off news from Friday that showed the eurozone economy shrinking a record 2.5 percent in the first quarter, including a 3.8 percent drop for Germany.
Analysts said that despite the weak news from the first quarter, things were looking somewhat brighter for the remainder of 2009 with credit costs falling and confidence rising.
In London trade Tuesday, the euro was changing hands at 1.3601 dollars against 1.3558 dollars late on Monday, at 130.95 yen (130.57), 0.8784 pounds (0.8834) and 1.5151 Swiss francs (1.5107).
The dollar stood at 96.24 yen (96.31) and 1.1134 Swiss francs (1.1141).
The pound was at 1.5491 dollars (1.5344).
On the London Bullion Market, the price of gold fell to 924.75 dollars an ounce from 929.75 dollars an ounce late on Monday.
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