The euro hit 2-1/2 month highs against sterling on Wednesday after an improvement in German business morale reinforced signs that Europe's largest economy was recovering from recession. The Munich-based Ifo think tank's business climate index rose to 90.5 from an upwardly revised 87.4 in July, beating an 88.9 median forecast in a Reuters poll.
The euro initially hit the day's high against the dollar after the data, but erased gains as softer European shares cut demand for high-yielding assets. The euro's rise was sustained against sterling, however, as traders played on shifts between eurozone and British bond yields and interest rates against the pound.
The euro rose to 87.94 pence, its highest level since early June. It was last 0.3 percent up on the day at 87.80 pence. "The euro has done better on the back of Ifo," said Daragh Maher, deputy head of global foreign exchange research at Calyon in London.
By 1114 GMT, the euro was little changed on the day at $1.4290 against the dollar. "We tend to favour positioning for a stronger euro against the pound at the moment rather than the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ in London. "That's where the clearest positioning is going forward if you want to position for an earlier euro zone recovery compared to the UK."
Higher-yielding and commodity-linked currencies such as the Australian dollar reversed earlier gains after European equities snapped four straight sessions of gains led by commodity stocks. The pan-European FTSEurofirst 300 index was last down 0.4 percent. These currencies had firmed earlier after a 1.78 percent rise in the Shanghai stock market supported demand for riskier assets.
The dollar index, a gauge of the unit's performance against six major currencies, was 0.3 percent up on the day at 78.49. Against the yen, the dollar was little changed on the day at 94.10 yen. The yen reversed most of its earlier losses against currencies considered to be high-risk, rising 0.3 percent against the Australian dollar to 78.39 yen. The Australian currency was 0.2 percent lower against the dollar at $0.8331, erasing earlier gains.