* Euro recovers from low of $1.2814, German data helps
* But common currency vulnerable to risk of contagion
* Aussie recovers from 5-month low vs dollar
By Anirban Nag
LONDON, May 15 (Reuters) - The euro held above a four-month low on Tuesday after German economic growth beat expectations, although gains could prove fleeting as the political stalemate in Greece stokes fears that Athens may renege on bailout pledges and exit the currency bloc.
European powerhouse Germany saw its economy expand in the first quarter at a robust clip of 0.5 percent, shaking off any fears of a recession. But a survey of German analyst and investor sentiment fell sharply in May, while GDP in France flatlined and Italy contracted sharply.
Overall, much of the euro zone was still struggling with a slowdown, putting pressure on the European Central Bank to loosen monetary policy to support the economy.
That is likely to see bears take a stronger grip of the euro. Also, concerns about slowing Chinese and global growth are likely to keep investors away from higher-yielding currencies as they prefer the safe-haven dollar and yen. Earlier, the Australian dollar flirted with a five-month low against the U.S. currency before paring losses.
"The better-than-expected German numbers have offered the euro some support but it remains vulnerable to headlines," said Jane Foley, senior currency strategist at Rabobank.
"It serves as a reminder to investors why the euro has been resilient to downside risks. But the prospects for the ECB to step in over the coming months to address not only the recession but contagion fears are rising."
The euro was 0.2 percent higher at $1.2845, off a four-month low of $1.2814 struck earlier in the day. It found some support at $1.2827, the 76.4 percent retracement of its rally earlier this year from $1.2624 to $1.3486.
A clear break of that retracement level could open the way for a test of the January low of $1.2624, though some analysts said the euro could enjoy some rebound in the short term, having fallen more than three percent so far this month.
Any bounce in the euro could run out of steam above $1.2880-$1.2900 with peripheral bond yields still at elevated levels. That highlighted the risk of contagion from the Greek deadlock spreading to other euro zone countries.
Data on Tuesday showed the Greek economy deep in recession, and there was little hope of it forming a government soon. Greek President Karolos Papoulias's proposal to put together a technocrat administration was unlikely to be accepted, making a new election the most likely outcome.
Many market players think a fresh election will make it more likely for Athens to ditch its bailout pledges and hence the euro, even though euro zone finance ministers dismissed talk of Greece's exit as "propaganda and nonsense".
GLOOMY EUROZONE
The German ZEW think-tank said uncertainty after the recent elections in Greece and France had probably contributed to a sharp slide in sentiment. The index fell to 10.8 in May from 23.4 in April, well below a consensus forecast for a drop to 19. .
"These economic numbers change nothing for the euro zone," said Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Capital. "Germany is the standout, based on the GDP numbers, but the rest are struggling and we expect the euro to drift lower towards those lows of $1.2630."
The dollar index was hovering near a four-month high of 80.739, having made solid progress in the past few sessions on safe-haven flows.
While the dollar has benefited from the euro zone's woes, its gains have been curbed by speculation the U.S. Federal Reserve may take additional steps should the economy falter.
Even though not many market participants expect the Fed to announce fresh easing steps next month, U.S. retail sales and consumer inflation numbers due later in the day are in focus because they could change that expectation.
Against the yen, the dollar moved little at 79.88 yen , above a 2-1/2-month low of 79.428 yen hit last week, with major support seen at 79.14, a 61.8 percent retracement of its rally from February to March.
The Australian dollar touched a five-month low of $0.9945 , after the minutes of the latest Reserve Bank of Australia meeting showed concerns about a cooling in growth and inflation were behind its unexpected 50 basis point rate cut in May. It pared losses to trade at $0.9986, up 0.3 percent on the day.
* But common currency vulnerable to risk of contagion
* Aussie recovers from 5-month low vs dollar
By Anirban Nag
LONDON, May 15 (Reuters) - The euro held above a four-month low on Tuesday after German economic growth beat expectations, although gains could prove fleeting as the political stalemate in Greece stokes fears that Athens may renege on bailout pledges and exit the currency bloc.
European powerhouse Germany saw its economy expand in the first quarter at a robust clip of 0.5 percent, shaking off any fears of a recession. But a survey of German analyst and investor sentiment fell sharply in May, while GDP in France flatlined and Italy contracted sharply.
Overall, much of the euro zone was still struggling with a slowdown, putting pressure on the European Central Bank to loosen monetary policy to support the economy.
That is likely to see bears take a stronger grip of the euro. Also, concerns about slowing Chinese and global growth are likely to keep investors away from higher-yielding currencies as they prefer the safe-haven dollar and yen. Earlier, the Australian dollar flirted with a five-month low against the U.S. currency before paring losses.
"The better-than-expected German numbers have offered the euro some support but it remains vulnerable to headlines," said Jane Foley, senior currency strategist at Rabobank.
"It serves as a reminder to investors why the euro has been resilient to downside risks. But the prospects for the ECB to step in over the coming months to address not only the recession but contagion fears are rising."
The euro was 0.2 percent higher at $1.2845, off a four-month low of $1.2814 struck earlier in the day. It found some support at $1.2827, the 76.4 percent retracement of its rally earlier this year from $1.2624 to $1.3486.
A clear break of that retracement level could open the way for a test of the January low of $1.2624, though some analysts said the euro could enjoy some rebound in the short term, having fallen more than three percent so far this month.
Any bounce in the euro could run out of steam above $1.2880-$1.2900 with peripheral bond yields still at elevated levels. That highlighted the risk of contagion from the Greek deadlock spreading to other euro zone countries.
Data on Tuesday showed the Greek economy deep in recession, and there was little hope of it forming a government soon. Greek President Karolos Papoulias's proposal to put together a technocrat administration was unlikely to be accepted, making a new election the most likely outcome.
Many market players think a fresh election will make it more likely for Athens to ditch its bailout pledges and hence the euro, even though euro zone finance ministers dismissed talk of Greece's exit as "propaganda and nonsense".
GLOOMY EUROZONE
The German ZEW think-tank said uncertainty after the recent elections in Greece and France had probably contributed to a sharp slide in sentiment. The index fell to 10.8 in May from 23.4 in April, well below a consensus forecast for a drop to 19. .
"These economic numbers change nothing for the euro zone," said Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Capital. "Germany is the standout, based on the GDP numbers, but the rest are struggling and we expect the euro to drift lower towards those lows of $1.2630."
The dollar index was hovering near a four-month high of 80.739, having made solid progress in the past few sessions on safe-haven flows.
While the dollar has benefited from the euro zone's woes, its gains have been curbed by speculation the U.S. Federal Reserve may take additional steps should the economy falter.
Even though not many market participants expect the Fed to announce fresh easing steps next month, U.S. retail sales and consumer inflation numbers due later in the day are in focus because they could change that expectation.
Against the yen, the dollar moved little at 79.88 yen , above a 2-1/2-month low of 79.428 yen hit last week, with major support seen at 79.14, a 61.8 percent retracement of its rally from February to March.
The Australian dollar touched a five-month low of $0.9945 , after the minutes of the latest Reserve Bank of Australia meeting showed concerns about a cooling in growth and inflation were behind its unexpected 50 basis point rate cut in May. It pared losses to trade at $0.9986, up 0.3 percent on the day.
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