The euro advanced on Wednesday after a surprise rise in German business sentiment dented expectations of a near-term cut in eurozone interest rates.

The Ifo business climate index rose from 104.1 in February to 104.8 in March, climbing for a third consecutive month and beating expectations for a slight fall.

Analysts said the news was likely to reinforce the notion that the eurozone economy would remain relatively resilient to the woes enveloping the US.

They said it would vindicate the stance of the European Central Bank, which thus far has refused to follow the Federal Reserve in cutting interest rates in the face of the credit crisis, maintaining that the upside risks to inflation outweighed growth concerns.

Jean-Claude Trichet, president of the ECB, emphasised the central bank’s hawkish stance, maintaining his commitment to contain inflationary pressures in testimony to the European Parliament on Wednesday.

Analysts said the rise in the Ifo index was a surprise, since the economic and financial backdrop was far from ideal during the survey period, with a soaring euro, rising energy prices and a declining stock market.

Peter Vanden Houte at ING said taken together with a stronger French business climate indicator than expected released earlier in the session, the Ifo could hardly be called “the stuff eurozone rate cuts were made of”.

However, he said he continued to believe the risks to the eurozone growth outlook were skewed to the downside, leaving the door open to eurozone rate cuts by the summer.

He said: “Although the euro might find renewed support, we believe that the upward pressure on the euro exchange rate will not last.

“The cyclical divergence now hurting the dollar is likely to become the euro’s burden in the second half of the year.”

By midday in New York, the euro rose 0.8 per cent to $1.5750 against the dollar and gained 1.1 per cent against the pound to £0.7875.

Sterling lost 0.3 per cent to $1.9995 against the dollar and 1.2 per cent to Y198.30 against the yen, undermined by comments from Charles Bean, a member of the the Bank of England’s monetary policy committee, who said the risks to sterling were to the downside.

Analysts said the fact that the Bank of England did not seem worried about the fall in the pound was a shock and raised the chances of a near-term cut in UK interest rates.

The dollar remained under pressure following more dismal US economic figures that showed machinery orders recorded their biggest drop on record in February.

The dollar fell 0.9 per cent to Y99.15 against the yen, 1 per cent to SFr0.9960 against the Swiss franc and 0.3 per cent to $0.9210 against the Australian dollar.