FOREX-Euro surges, strong Ifo cools ECB cut expectations

(Recasts with Ifo)

By Toni Vorobyova

LONDON, March 26 (Reuters) - The euro rallied versus the dollar on Wednesday after a surprise rise in German business sentiment poured cold water on any expectations of near-term euro zone interest rate cuts.

The headline Ifo index rose to 104.8 in March from 104.1 -- notching up its strongest reading since last August and wrong-footing the consensus forecast for a fall to 103.4.

The strong reading contrasted with Tuesday's data releases from the United States, where consumer confidence plunged to a 5-year low in March while home values posted a record drop in January.

"This is the third consecutive month that the Ifo has come out on the strong side of expectations," said Audrey Childe Freeman, European economist at CIBC World Markets.

"It sort of backs up a continued decoupling story for Germany and the euro zone as a whole (from a slowing U.S. economy)," she said, adding that it also backed up views that the European Central Bank would not cut rates anytime soon.

By 0915 GMT, the euro was up half a percent on the day at $1.5702, having reversed earlier losses and around a cent above the levels seen just before the Ifo release EUR=.

Euribor interest rate futures turned negative after the data as the money market trimmed bets for ECB rate cuts from the current 4 percent. They are now pricing in only a 2-in-3 chance of a cut by year-end -- compared to having factored in more than two 25 basis point moves a week ago FEIZ8.

The rise in euro/dollar also dragged the greenback down against other major currencies. The dollar was down 0.2 percent at 99.88 yen, dipping back below the psychologically key 100 mark JPY=.

It also lost around a third of a percent versus the Swiss franc CHF=.

GOLD, BANKS

"While there has been noise from policymakers with regards to the level of the euro, we continue to believe that (ECB) intervention is a very low risk event," JP Morgan said in a research note concerning prospects of any early ECB rate cuts or strengthening of its rhetoric on currencies.

"Given inflation remains at such elevated levels in the euro area, the higher euro is actually helping the ECB meet its mandate."

In the United States, February durable goods orders and new home sales will take central stage.

The financial sector also remains in the spotlight, with European shares opening lower after Deutsche Bank (DBKGn.DE) said the disruption to revenues and writedowns on assets stemming from global credit turmoil could put its profit goal for this year at risk.

Commodities and energy prices could also give direction to the currency market, given their high positive correlation with euro/dollar. (Additional reporting by Veronica Brown; editing by Stephen Nisbet)