The euro briefly rallied against the dollar, European shares came off lows and bond prices fell yesterday after data showing German investor confidence had risen much more strongly than expected.

A poll of analysts and institutional investors by the ZEW economic research institute showed German investor confidence rose to a 17-month high in August as signs of a revival in domestic demand boosted the country’s economic outlook.

“The ZEW tends to react to a pick-up in equities, that’s why there was a rise,” said Neil Parker, market strategist at RBS Financial Markets. “But oil prices and the euro rose and that’s not good for the German economy.”

ZEW’s investor expectations indicator surged to 50.0 from 37.0 in July, well above expectations for a rise to 38.5.

The ZEW survey is seen as a pointer to the direction of the Ifo research institute’s closely-watched measure of German business sentiment, which will be issued tomorrow.

The euro briefly rose as high as $ 1 2255 against the dollar on the surprisingly strong ZEW survey before paring gains to trade steady at $1 2213.

The dollar was a third of a percent higher against the yen at 110.11 yen.

Yields on euro zone 10-year treasury paper rose 3.0 basis points to to 3 193 percent after falling to 3 163 on Monday – their lowest since early July.

U.S. 10-year Treasury yields were trading at around 4.217 percent ahead of housing sales data due at 1400 GMT.

<B>Oil hits shares</B>

US stock index futures indicated a flat start on Wall Street as a rise in oil prices offset optimism on a series of mergers and acquisition developments.

US crude oil oil crept up to $66 a barrel, which hit European stock markets on worries about profit margins.

The pan-European FTS Eurofirst index of 300 blue chips rose above the day’s low of 1 185.2 points to 1 189.0, helped by the ZEW survey, but was still 0.4 percent below its previous close.

Oil prices rose on worries over persistent global supply disruptions. Fund managers said though corporate earnings were coming in ahead of market expectations, high oil prices remained a worry.

“At some time it must hit the margins. I suppose it’s just indicative of strong global demand which is allowing industrial companies to pass it on in higher prices,” said Andrea Williams, head of European equities at Royal London Asset Management.

In Tokyo, Japan’s Nikkei share average ended up 0.16 percent at 12 472.9 points, its highest close in four years, as more for foreign buying boost non-bank financial firms.

Gold prices were steady a $ 439.5 an ounce as the dollar slipped against the euro while LME copper drifted lower.

<B>Anshuman DAGA</B>