FOREX-Euro rallies as data clouds rate cut outlook

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, March 26 (Reuters) - The euro rallied against the dollar on Wednesday after strong European economic data dented expectations of near-term euro zone interest rate cuts.

The headline German business sentiment 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.

Euro zone industrial new orders also turned out much stronger than expected in January while French business sentiment reached its highest level so far this year in March, easing concerns that the euro's strength was damaging the European economy.

European Central Bank President Jean-Claude Trichet told the European Parliament he sees continuing growth in gross domestic product looking forward, but upward risk to price stability in the medium term.

"First there was the Ifo index that was stronger than expected, then Trichet came out sounding hawkish on price stability reinforcing the view that the ECB is very far from cutting rates in the hear term," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

The strong European numbers 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.

"There is no improvement in sight for the situation in the U.S. which is negative for the dollar," Praefcke added.

By 1123 GMT, the euro was up 0.7 percent on the day at $1.5735, having reversed earlier losses and more than a cent above the levels seen just before the Ifo release EUR=.

Euribor interest rate futures turned negative after the data. They are now pricing in only a 50 percent chance of an ECB cut by year-end while they factored in more than two 25 basis point moves a week ago FEIZ8.

The dollar also saw significant falls against other major currencies, dropping 0.8 percent versus the yen to 99.24 yen, below the psychologically key 100 mark JPY=. It also lost 0.85 percent versus the Swiss franc CHF=.

AILING POUND

But the greenback managed to post gains against the pound which took a knock after Bank of England policymaker Charles Bean said risks to sterling were to the downside.

The pound was down 0.4 percent at $1.9970 GBP=. The euro rose more than 1 percent versus sterling to 78.80 pence, closing in on an all-time high of 79.12 EURGBP=.

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

"Expectations are for a modest number this afternoon (for U.S. durable goods)," said CMC Markets in a note to clients.

"Any (upside) surprises here would arguably bring some much-needed support for the dollar, but if this fails to materialise then we risk resuming that race to the EUR/USD levels of $1.60-1.65 that some are suggesting would put the prospect of coordinated central bank intervention squarely in the frame." (Editing by David Christian-Edwards)