* Below forecast Ifo, PMIs hit euro
* Dollar bought ahead of this week's Fed meeting
* FX market shrugs off Saudi's oil output pledge
(Updates prices, adds quotes, changes byline, changes
dateline, previous LONDON)
By Steven C. Johnson
NEW YORK, June 23 (Reuters) - The euro fell on Monday after
data showed the euro zone's manufacturing and services sectors
contracted last month as German business sentiment dipped,
denting the case for higher euro zone interest rates.
The dollar, meanwhile, moved higher ahead of a Federal
Reserve meeting this week that investors expect to involve
stern talk about the risks of rising inflation.
The Fed is expected to hold rates at 2 percent on Wednesday
but surging energy and food price inflation has futures markets
pricing in at least a pair of rate hikes by year end.
Oil prices <CLc1> rose above $136 a barrel on Monday as
supply disruptions in Nigeria offset Saudi Arabia's promises to
pump more oil. [].
Unlike the Fed, the European Central Bank has signaled a
rate hike in July, though policy-makers have been quick to note
that such a move would not necessarily lead to a series of
hikes -- a view supported by Monday's crop of weak data.
Data showing the manufacturing and service sectors
contracted in June -- the latter for the first time in five
years -- "is further confirmation of deteriorating economic
conditions in the euro zone," said Benedikt Germanier, currency
strategist at UBS in Stamford, Connecticut.
At the same time, the German Ifo business climate index
fell more than expected to 101.3 in June, its lowest since
December 2005.
The euro was last down 0.8 percent at $1.5488 <EUR=>, while
the dollar index <.DXY> added 0.6 percent to 73.451.
The euro was down 0.1 percent 167.23 yen <EURJPY=> after
earlier dipping to a session low of 166.88 yen.
The dollar also rose 0.6 percent to 108.00 yen <JPY=>,
boosted after a Japanese government survey of large
manufacturers showed sentiment deteriorated in the second
quarter.
But gains for the greenback may be limited, as yen moves
are primarily being driven by external factors such as market
risk appetite. Brown Brothers Harriman strategists cite
resistance at 108.60 yen.
DATA DAMPENS
Following the German and euro zone data, the Bundesbank
said Germany's economy is set to contract slightly in the
second quarter of this year after expanding at its strongest
clip since 1996 in the first three months.
Although analysts said it was probably too late for the ECB
to abandon its plans for a July rate hike to 4.25 percent, they
admitted the data reduced the chance of additional tightening.
"The falls are probably not sharp enough to stop the ECB
hiking in July. It would take more data on the downside for
inflation for them to wait," said Juergen Michels, economist at
Citigroup in London. "But the data today will cause some
intense debate about rate-setting."
The Fed, meanwhile, was seen as more likely to hike rates
the longer oil remains at elevated levels.
"It seems likely (the Fed) would respond to rising oil by
tightening monetary policy, so that is a supportive feature for
the dollar," said Derek Halpenny, senior currency strategist at
BTM-UFJ in London.
(Additional reporting by Veronica Brown in London, Editing
by Chizu Nomiyama)
