German business sentiment was more resilient than expected in August to raise growth hopes for Europe's largest economy and give a lift to the euro.
The Munich-based Ifo research institute said its business climate index, based on a monthly survey of around 7,000 firms, fell to 105.0 from 105.6 in July. The mid-range forecast of 63 economists polled by Reuterslast week had predicted 104.8.
The euro rose by more than half a US cent against the dollar to $1.2815 following the Ifo figures, while the September Bund future fell as low as 117.49, having earlier hit session highs of 117.99.
Germany's DAX index of blue-chip shares erased earlier losses and nudged into positive territory.
The August Ifo result was underpinned by a surprisingly positive corporate view of the current situation in Germany. Ifo's measure of current conditions remained unchanged at 108.6, close to a multi-year high and bucking expectations for a drop.
The ZEW reading reflected investors' belief that the economy would be unable to sustain the pace of growth achieved in the second quarter, when GDP expanded by 0.9 per cent, the best performance in over five years.
Figures published by the Federal Statistics Office earlier today showed that growth was powered by a big increase in investment, particularly in the construction sector, and by a slight increase in net trade.
Although the GDP data pointed to a decline in private consumption in the second quarter, an official at the Statistics Office said these figures were likely to be revised up.
Strong tax revenues in July, particularly those from sales tax, had earlier fuelled hopes that the domestic economy had started the third quarter in good shape.