Euro drops as confidence collapses

German confidence has big obstacles to overcome

German business confidence has collapsed to an eight-year low, the country's leading economic think tank has reported, sending the euro diving below $0.90.

Ifo report

The business index is based on a survey of more than 7,000 businesses' views on current and future business conditions and is considered a reliable indicator of German economic growth.

The much-watched Ifo business climate index dropped to 85 in September, down from 89.8 in August, well below analysts' predictions.

"The numbers were a lot worse than anyone expected," said Sonja Hellemann, a currency expert with Dresdner Kleinwort Wasserstein in London.

The euro fell against the dollar to an intra-day low of $0.8981 before climbing back up to around $0.90 by 1200GMT.

The euro now stands more than 3% below a peak hit after the 11 September attacks on the US.

Friday's report was Ifo's first based entirely on data collected since the attacks.

Attack reaction

Gernot Nerb, the Ifo economist in charge of the business survey, said the sharp drop in September might have been an overreaction to attacks on US cities, and could stabilise next month.

"You can never exclude that the index will stabilise, but I would certainly not expect a continuation of this [negative] trend next month," he told Reuters.

The data is expected to add to pressure on the European Central Bank to cut interest rates further to prop-up the eurozone economy.

The euro made no gains this week against the dollar despite difficulties in the US including poor economic news and the anthrax alert which shut down Congress.

German outlook

Meanwhile, Germany's "five wise men", a panel of economic advisors to the government, said they expected the country's economy to grow by next year of no more than 1%, lower than the official estimate, the Berliner Zeitung newspaper reported on Friday.

The statement followed a warning on Thursday by Finance Minister Hans Eichel that domestic growth could fall to 0.75% this year, hitting 1.5% in 2002.

The government's official forecast for economic growth is 2.0%.

The "wise men" are due to unveil their new forecasts in an autumn report released in mid-November, Berliner Zeitung said, quoting unnamed sources.

Germany's six leading economic institutes have also cut their domestic growth forecast to 0.7-0.8%, compared with a previous estimate of 2.1%, the Financial Times Deutschland reported.

The forecasts could be revised again before publication on Tuesday, the newspaper added.