* Euro falls against dollar and yen after German ZEW
* Dollar index hovers near 5-week high
* Yen selling curbed by sharp rise in Japan bond yields
By Anirban Nag
LONDON, May 14 The euro fell on Tuesday after
German investor morale pointed to a tepid recovery in Europe's
largest economy and offset a bigger-than-expected rise in
industrial output in the euro zone.
The euro drew some support from signs of a robust response
to a Spanish syndicated debt sale, but with the broader euro
zone still grappling with a recession and risks that the
European Central Bank could slash its deposit rate - the level
at which banks park surplus funds with it - to negative,
investors were cautious about the single currency.
The euro gave up earlier gains and was down 0.15 percent
against the dollar at $1.2955, well below a session high
of $1.3030 and not far from a five-week low of $1.2935 with
model funds cited as sellers.
It was down 0.4 percent at 131.765 yen.
"We saw a bit of a squeeze in the euro that took it higher,
but it has petered out," said George Saravelos, currency
strategist at Deutsche Bank. "The talk of negative rates is
putting a ceiling on the euro and while a cut is not our
baseline scenario, there is a risk of it happening."
The ZEW think tank said its monthly poll of economic
sentiment rose to 36.4 points from 36.3 in April. It fell short
of expectations for a reading of 38.3.
Data also showed output at euro zone factories rose much
more strongly than expected in March, but the overall picture
remained mixed as industrial output in France and Italy, the
bloc's second and third largest economies, decreased.
ECB policymakers have been flagging the prospects of further
monetary easing, including a cut in the deposit rate currently
at zero, if economic activity deteriorated. This would mean
depositors would be charged for leaving funds there, hence
keeping the currency under pressure, traders said.
DOLLAR INDEX RECOVERS
The euro's fall saw the dollar index, which tracks
the U.S. currency's performance against a basket of major
currencies, cut losses. It was up on the day at 83.36, not far
from a five-week high of 83.438 struck on Friday.
The dollar also pared most of its losses against the yen,
and was last trading down 0.1 percent on the day at 101.70 yen
. It was not far from a 4 1/2-year high of 102.15 yen set
Traders said the yen-selling spree was on pause due to a
spike in Japanese government bond yields, which reduces the
relative attraction of foreign bonds for Japanese investors.
But the dollar was underpinned by data showing U.S. retail
sales unexpectedly rose in April. It could gain further if
upcoming U.S. economic data pointed to a recovery.
"We think against the yen the dollar can go higher, helped
by rising U.S. yields," said Marcus Hettinger, FX strategist at
There is a raft of U.S. data this week including Wednesday's
industrial production, housing starts and consumer prices on
Thursday and consumer sentiment data on Friday.
The rise in core retail sales, in the wake of strong job
growth in the last three months, strengthened the view the U.S.
Fed could scale back its asset-buying programme later this year.
(Editing by Hugh Lawson and Chris Pizzey, London MPG Desk, +44