FOREX-Euro falls to 3-month low on German data, dollar firm

Reuters

* Euro pinned down as German Ifo misses expectations

* S&P upgrade of Spain's credit rating stems euro's fall

* Dollar holds steady despite lower Treasuries yields

* U.K., U.S. financial markets are closed on Monday (Updates market action, adds quote)

By Richard Leong

NEW YORK, May 23 (Reuters) - The euro fell to a three-month low against the dollar and a 17-month trough against the pound on Friday after a disappointing report on German business sentiment supported the view the European Central Bank will cut interest rates next month.

Concerns that Sunday's European Union election results could destabilize some euro zone governments also weighed on the euro.

Germany's leading indicator of business confidence, the Ifo index, pointed to slower growth in Europe's largest economy as the index hit its lowest level this year in May.

"That put pressure on the euro. It reinforces expectations the ECB will ease policy sooner rather than later," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.

The euro fell to a three-month low of $1.3614 and briefly broke below its 200-day moving average of $1.3636 before retracing to $1.3631. Against the yen, the single currency was flat at 138.92 yen, erasing modest losses, and held above a 3-1/2 month low set on Wednesday.

The euro fell to a 17-month low against the pound at 80.815 British pence before moving back to 81.000 pence.

Trading volume, as expected, faded faster than usual before the weekend. There is a U.K. bank holiday on Monday while U.S. financial markets will be closed for Memorial Day.

Investors also trimmed euro holdings before EU election results due at about 2100 GMT on Sunday, traders said. A strong showing by fringe parties would highlight the anti-euro and anti-austerity sentiment in countries like Italy and Greece that have regained market confidence.

"There are some concerns about the extremist parties gaining ground," said Alan Ruskin, global head of G19 currency strategy with Deutsche Bank in New York.

Weaker euro zone members have shown progress in managing their high debt loads. Earlier, Standard & Poor's upgraded Spain's credit rating by a notch to BBB, helping to stem euro's fall and to spur a rally in peripheral euro zone debt.

DOLLAR STEADY

The euro's modest losses boosted the dollar index, which tracks the greenback against a basket of major currencies, to its highest in six weeks at 80.443 before easing to 80.364.

Against the yen, the dollar was up 0.2 percent at 101.93 , recovering from the 3-1/2 month low of 100.805 yen hit two days earlier.

The benchmark U.S. 10-year yield finished at 2.536 percent, down 2 basis points on the day despite a stronger-than-expected new home sales report. It touched a 1-1/2 week high of 2.566 percent on Thursday, almost 10 basis points above the 6-1/2 month low set last week.

(Additional reporting by Anirban Nag in London; Editing by Toby Chopra, Susan Fenton, Meredith Mazzilli and Nick Zieminski)

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