Wallets Prefer Euros

Investors took cover in the euro after an upbeat German business confidence survey suggested that Europe's biggest economy may be performing better than recently expected. The euro was swapping hands at $1.3228 early Wednesday, up from $1.3190 late Tuesday.

The Munich-based Ifo institute said its business climate index for Germany rose to 108.7 in December, its highest level since 1990, from 106.8 in November. Analysts had expected a far more modest rise to 107.

"An unexpected jump in the German Ifo survey of business conditions in December heightened expectations of further ECB interest rate hikes in 2007," wrote National Australia Bank senior researcher John Kyriakopoulos.

Consensus forecasts had been for a steady Ifo index reading in December after the barometer returned to a 15-year high in November.

The positive performance in the 12-nation euro zone's largest member is all the more surprising given Germany's upcoming 3 percent rise in VAT to 19 percent from Jan. 1, which many experts believe could put the brakes on consumer spending and therefore on economic activity as a whole.

A sign for 2007?

But Ifo President Hans-Werner Sinn insisted that the German economy "is in an extraordinarily strong boom last seen in 1990."

Companies were not only feeling confident about their current business but were also more optimistic about the six-month outlook, Sinn said.

For its monthly survey, Ifo polls about 7,000 companies on their assessment of current business and their expectations for the next six months.

German Economics Minister Michael Glos hailed the figure, saying it boded well for next year.

"I'm expecting 2007 to be a successful year for the German economy," he said.

Ifo's own chief economist Gernot Nerb described the figures as "surprisingly good."

"They show that the recovery particularly in the manufacturing sector is continuing," Nerb added.

Germany ready for VAT hike

Analysts too were cheered by the robustness of the data.

"Did anybody ever worry about the impact of the looming VAT hike, the stronger euro or the US slowdown on the German economy?" asked Bank of America economist Holger Schmieding. "German businesses no longer seem to share such concerns at all."

The rise in the Ifo index "suggests that the German economy will continue to expand at an above-trend pace well into 2007," Schmieding said.

DekaBank economist Andreas Scheuerle suggested that the VAT hike would lead to a "short dip" in the first quarter of 2007, but that the economy would then resume its upward course.

"We'll be able to toast to a very presentable 2007," Scheuerle said.

Thomson Financial IFR Markets analyst Zaki Kada said the Ifo data did "not point to a slowdown next year ... and it is looking increasingly likely that the German economy will weather the VAT hike in the first quarter of 2007."