By Robin Shepherd
LONDON, Oct 19 - The euro slid to its lowest level against the dollar since September 11 on Friday, dropping below $0.90 after a weak west German business sentiment survey raised concerns of recession in Europe's largest economy.
The closely watched Ifo business climate indicator tumbled to its lowest reading for nearly eight years in September, reflecting the impact of last month's attacks on the U.S. on German business confidence.
It came in at 85.0, well below the consensus forecast for a fall to 88.1 from 89.5 in August. It is the Ifo institute's first survey entirely based on data collected after September 11.
"We are seeing the initial dip for the euro. But in the longer term the weak Ifo will help the euro because it should push the European Central Bank into cutting rates next Thursday," Lee Ferridge, head of global currency strategy at Rabobank, said.
The euro fell by a third of a percent against the dollar and hit an intra day low of $0.8981 . It is now more than three percent below its peak following the September attacks.
It also dropped by a third of a percent against the yen and was trading just above intra day lows of around 108.90 .
Sterling also dipped on the Ifo survey, slipping to an eight week low below $1.4395 .
IFO HIGHLIGHTS FLAGGING GROWTH
The Ifo survey brought ECB monetary policy back into the forefront of market thinking.
The ECB left interest rates unchanged at its last meeting on October 11, disappointing business leaders and politicians who were hoping for a monetary easing to boost the euro zone's flagging growth prospects. "The decline in the expectations index is particularly disappointing, showing there is no glimmer of hope. It is now more likely that the ECB will cut rates next week and we cannot rule out the possibility of a recession in Germany," said Commerzbank economist Christoph Hausen.
On Thursday, German Finance Minister Hans Eichel said his country was likely to grow by just 0.75 percent this year, a prediction sharply at odds with the government's official two percent growth forecast.
"The Ifo survey was worse than anticipated. I think the risk is on the downside for the euro, and the next target will be $0.8950," a London based dealer said.
Despite the gloom, Gernot Nerb, the economist in charge of the Ifo survey, said that the sharp drop in business sentiment might have been an overreaction to the September 11 attacks.
He added that he did not expect the negative trend to continue through into next month's survey.
Bank of France Governor Jean-Claude Trichet, a member of the ECB governing council, said on Thursday the ECB did not believe it had "immense" room for action on interest rates.
U.S. TROOPS IN AFGHANISTAN
Prior to the German data, major currencies were locked in tight ranges, seemingly unexcited by official acknowledgment from Washington that special U.S. forces were on the ground in Afghanistan.
Traders said, however, that anthrax scares, tension in Israel and the broader situation surrounding Afghanistan made for a tense atmosphere in the dealing rooms.
The key U.S. data release of the session comes at 1230 GMT with U.S. September inflation.