LONDON, Aug 26 (Reuters) - The dollar surged on Tuesday, hitting a six-month high against the euro as the single currency tumbled after surprisingly weak German data raised the spectre of recession in the euro zone and fuelled speculation of interest rate cuts.
The dollar extended its dramatic rally of the past month, hitting its highest this year against a basket of currencies as a disappointing business climate indicator added to the view that economic weakness, once thought to be limited to the United States, is spreading globally.
The Ifo German business climate index in August fell to 94.8 from 97.5 in July, more than the slight dip to 97.1 economists had expected and adding to the view that the economy is in severe slowdown mode and could well enter a technical recession. "It's not a good number, ain't no doubt about that," said Marc Ostwald, strategist at Monument Securities.
"It leaves the euro under a lot of pressure, without any doubt ... Certainly this reinforces the market's view that the ECB's next move will be a cut, not a rise, and that a move may come in the next six months or so."
The euro is down more than 6 percent this month nd looking set for the biggest monthly fall since its 1999 launch, on the growing view that a weak euro zone economy will prompt the European Central Bank to cut rates despite high inflation.
Adding to the euro's woes on Tuesday were data showing that German GDP contracted in the second quarter for the first time since 2004, while German consumer sentiment worsened more than expected, hitting a five-year low [ID:nLQ127223].
"(R)ight after the ECB rate hike in July, Germany may be falling into recession instead," said Holger Schmieding, economist at Bank of America.
"With Spain turning down, Italy struggling, and France losing a lot of momentum too, a serious German downturn would not bode well for the euro zone as a whole as well, to put it mildly."
DOLLAR SOARS
The dollar index .DXY rose to the year's high of 77.576, helped also by a 1 percent rise in the U.S. currency to 1.1082 Swiss francs
The pound fell to its lowest in over two years against the dollar to trade as low as $1.8336
Also adding to the dollar's rally was a 1.8 percent fall in U.S. crude oil prices CLc1, as falling oil prices are considered a relief to manufacturers in the world's largest oil consuming country.
Ongoing worries that other countries are vulnerable to U.S. economic weakness and jitters about the health of the financial industry weighed on stocks, with European shares falling nearly a full percent, taking a cut from their U.S. and Asian counterparts.
This prompted investors to bail out of risky trades higher-yielding currencies, pushing the Australian dollar
High-yielding currencies tend to suffer when risk aversion increases as investors exit trades where they use low-yielding currencies to fund purchases of these assets.
The New Zealand dollar fell around 2 percent, taking it within a cent of a one-year low of $0.6818 hit earlier in the month. The currency fell under selling pressure earlier in the day, when New Zealand posted its highest monthly trade deficit in 11 months in July.
(Editing by xxx)
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