May 21 (Bloomberg) -- The euro headed for its biggest two- day gain versus the dollar since March after German business confidence unexpectedly rose, bolstering speculation the European Central Bank won't cut interest rates.

The British pound fell against all of the major currencies after minutes from this month's Bank of England meeting signaled policy makers remain reluctant to lower interest rates to stimulate growth. Currencies of commodity-exporting nations including Australia and Canada surged as crude oil rose above $133 a barrel.

``The euro is heading back to $1.60,'' near the all-time high of $1.6019 set on April 22, said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. ``Interest- rate differential and high oil prices are supporting the euro.''

The euro climbed 0.9 percent to $1.5789 as of 4:29 p.m. in New York, from $1.5646 yesterday. It touched 80.342 pence per pound, the highest since April 25, from 79.490 yesterday, and rose to 162.72 yen, from 162.22. The yen rose to 103.05 per dollar, from 103.68.

The Munich-based Ifo institute said its index, based on a survey of 7,000 executives, rose to 103.5, from 102.4 in April. Economists predicted a decline to 102, according to the median of 44 forecasts in a Bloomberg News survey. Germany is the biggest economy in the euro region.

Most Federal Reserve officials at the central bank's April 29-30 meeting viewed the decision to cut the benchmark interest rate to 2 percent as ``a close call,'' judging risks between weaker growth and faster inflation had become more balanced, according to minutes of the meeting released today.

Fed in `Tight Bind'

Policy makers lowered their estimate of U.S. gross domestic product growth to a range of 0.3 percent to 1.2 percent this year, from the 1.3 percent to 2 percent they predicted in January, according to Fed records released today. The jobless- rate forecast increased to a range of 5.2 percent to 5.7 percent, from 5 percent to 5.3 percent.

``Although the economy could do with some monetary help, the Fed is in a very tight bind as inflation picks up,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``People are trying to pick up euros when they can and see bouts of dollar strength as selling opportunities.''

The yield advantage of a two-year German bund over a comparable Treasury note rose 3 basis points, or 0.03 percentage point, to 1.72 percent. The spread was 1.34 percent on May 13.

The dollar has fallen 3.3 percent versus the euro since May 8, when it touched $1.5285, a 4.6 percent rebound from its record low on April 22. A report on May 23 from the National Association of Realtors is forecast to show sales of previously owned homes in April fell for the eighth time in nine months, according to a Bloomberg News survey.

`Premature' Rally

``The dollar rally was a bit premature,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in an interview on Bloomberg Radio yesterday. ``There have been some glimmers of hope that maybe the U.S. economy was not as soft as some previously thought, but we think that conclusion was a bit premature.''

The ECB shelved a planned interest-rate increase last year to assess the economic impact of the credit squeeze. It has left its benchmark rate at a 6 1/2-year high of 4 percent since June. ECB President Jean-Claude Trichet said last month there is ``strong short-term upward pressure on inflation' and the economy has ``sound'' fundamentals.

British Pound

The pound was little changed versus the dollar at $1.9702. Earlier it fell 0.1 percent after the British central bank's minutes from the May 8 meeting showed its Monetary Policy Committee voted 8-1 to leave the main rate at 5 percent as consumer-price growth held above the 2 percent target for a seventh month.

If the Bank of England ``holds rates in the next couple of meetings, it just increases the probability they have to go down later on,'' said Peter Rosenstreich, chief market analyst at ACM Advanced Currency Markets SA in Geneva, to Bloomberg Television.

A government report tomorrow may show retail sales in Europe's second-largest economy fell in April. Sales at U.K. stores dropped 0.5 percent, after sliding 0.4 percent in March, according to the median of 30 forecasts in a Bloomberg News survey of economists.

Currencies influenced by commodity prices climbed as the price of crude oil surged above $133 a barrel for the first time and gold touched its highest level in a month. The Australian dollar touched 96.54 U.S. cents, the highest since 1983, from 95.86 cents yesterday, and Canada's currency rose 0.9 percent to 98.34 cents per U.S. dollar. Commodities including oil account for about half of Canada's exports.

The correlation coefficient between oil prices and the euro- dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time.

Trader Bets

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six trading partners, was 71.938 after touching a one-month low of 71.916.

Futures on the Chicago Board of Trade show traders see a 52 percent chance the Fed will raise its target rate for overnight lending between banks to at least 2.25 percent by year-end. The probability the central bank will keep the rate unchanged at its June 25 meeting is 90 percent.

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Ye Xie in New York at Yxie6@bloomberg.net

Last Updated: May 21, 2008 16:31 EDT