FOREX-Euro rises on strong German GDP, gains trimmed

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, May 15 (Reuters) - The euro strengthened on Thursday after Germany reported its strongest quarterly growth in 12 years but gains were muted as investors focused on likely slower growth ahead.

German gross domestic product expanded by 1.5 percent quarter-on-quarter in January-March, far exceeding forecasts and highlighting how much Germany has been buttressing the overall euro zone economy [nL15339192].

Along with a stronger-than-expected reading of French GDP growth, this helped the overall euro zone GDP figure for May increase by a stronger-than-expected 0.7 percent for the quarter [nL15156909].

However, the euro pared gains as some investors had expected an even stronger euro zone figure after the German gains came in so high.

"The German number really knocked the ball out of the park and given the sheer scale of the increase it's surprising there was not a bigger kick for the overall euro zone number," said Jeremy Stretch, strategist at Rabobank.

At the same time, figures showed that annual inflation in the euro zone was 3.3 percent in April, below March's record 3.6 percent, suggesting the possibility that inflation pressures may have peaked.

While the regional economy remains on firm ground for now, the Munich-based Ifo research institute's euro region economic climate index worsened to a five-year low in the second quarter, suggesting a slowing economy in coming months[ID:nBEB002089].

"The outlook from here is fairly negative and the lagged effects of slowing growth in the U.S. and the credit crunch are likely to be felt in the euro zone," said Jeremy Stretch, strategist at Rabobank.

The euro climbed as high as $1.5547 EUR= after the German data but pared gains to trade up 0.1 percent at $1.5495 by 1111 GMT as investors proved underwhelmed by the euro zone-wide data.

Sterling pulled away from a near three-month low against the dollar after UK Prime Minister Gordon Brown said that he hoped the Bank of England could cut interest rates, a move seen helping the ailing UK economy. (For details please double click on [nL15491507]).

Sterling was steady at $1.9453 GBP=, recovering from the day's low and off the low of $1.9363 since late February hit on Wednesday.

The dollar was little changed at 104.95 yen JPY=.

ECB ON HOLD

Growth in the euro zone through April has vindicated the European Central Bank's decision to hold interest rates at 4 percent despite nagging inflation risks, analysts said.