Jan. 27 (Bloomberg) -- German business confidence unexpectedly advanced in January to a three-year high, suggesting executives in Europe's largest economy are optimistic they will overcome the effects of the euro's appreciation.

Ifo's index of western German business sentiment rose to 97.4 from a revised 96.9 in December, the ninth straight gain and the highest reading since January 2001. Economists had expected the index to be unchanged, a Bloomberg News survey showed.

``We have reports from companies that they have seen better orders in the past three months and I hope that will soon be reflected in production figures,'' said European Central Bank board member Gertrude Tumpel-Gugerell in a televised interview with Bloomberg News.

ECB policy makers including Tumpel-Gugerell and President Jean-Claude Trichet have said they expect European economic growth to gather speed this year, even as the euro's gains erode the value of profit and sales made in the U.S. MAN AG, which makes heavy trucks and printing presses, said on Jan. 15 new orders rose in the fourth quarter as global growth improved.

In the U.K., Europe's second-biggest economy, manufacturing confidence increased to the highest in almost two years this month and factory orders rose the most since October 1996, the Confederation of British Industry said today. The U.K. bought 8.4 percent of German exports in the first 10 months of 2003.

Stocks Rise

Germany's DAX 30 index has gained 22 percent in the past six months, suggesting investors are optimistic about a recovery. The DAX rose 43.20, or 1 percent, to 4172.88 at 12:25 p.m., led by exporters including drugmaker Bayer AG and Siemens AG, Germany's biggest electronics company.

``Companies aren't gasping for breath under the euro's strength but show a robust confidence,'' said Anton Boerner, president of the BGA association of exporters and wholesalers, which represents 135,000 companies. ``Our biggest hope is that German consumers finally get on the same train.''

Ifo's index measuring future expectations was unchanged at 111.2, today's report showed, snapping eight months of gains. An index gauging the current situation rose to 84.3 from 83.3.

The increase in confidence ``suggests German companies are surprisingly relaxed about the deterioration in international competitiveness,'' said Juergen Michels, an economist at Citigroup Inc. in London. ``However, we expect a slowdown in the growth momentum in the course of 2004 when the full impact of the recent appreciation of the euro will be felt.''

Revenue Reduction

European companies are reporting reduced revenue and profit as the dollar's drop erodes the value of U.S. earnings when converted into euros. The euro rose to $1.2899 this month, the highest since its 1999 start, and has gained 15 percent in the past five months. The euro bought $1.2489 at 12:25 p.m. in Frankfurt, little changed from yesterday.

Bayerische Motoren Werke AG, the second-largest maker of luxury cars, said today sales fell 2.1 percent in 2003 because of the dollar's drop. Altana AG, Germany's fifth-biggest drugmaker, said the extent of profit and sales growth this year depends on currency moves.

``Companies said in a December survey that for the euro, a level of $1.30 would be a clear pain threshold,'' said Gernot Nerb, the Ifo economist in charge of compiling the business confidence index. ``But at the moment it doesn't look like the euro will exceed the threshold.''

Ifo, which gets some of its money from the government, questions executives each month about production, inventories, orders, prices and employment. The index, which is one of Europe's most widely watched economic indicators, peaked at 107.4 in November 1990 and reached a low of 76.7 in 1982.

`Hurting Us'

The currency's gains mean exporters are getting less money for goods sold abroad, unless they raise prices and risk losing market share. European exporters have cut export prices relative to domestic prices for the past two years, said Joerg Kraemer, chief economist at Invesco Asset Management in Frankfurt.

``The weak dollar is hurting us,'' said Wolfgang Dondorf, chief executive officer of Pfeiffer Vacuum AG, a German maker of pumps used in the semiconductor industry. ``We should go ahead and say we have to raise prices'' in the U.S. ``but we can't do that because it would cost us business.''

The Asslar, Germany-based company sells about a quarter of its products in the U.S., two-thirds of which are shipped over from Europe. The dollar's decline lowered earnings by about 3 million euros in fiscal 2003, he said. The company was able to recoup around 1.5 million euros of that sum by hedging against currency risks, he said.

Investment Deterrent?

``The euro has a negative impact not only on exports, but on profit margins and therefore on investment and hiring,'' said Kraemer, who estimates that a 10 percent increase in the exchange rate lowers economic growth by about 0.6 percentage points in the following four quarters.

Demand within Germany and Europe hasn't recovered sufficiently to make growth less reliant on exports. Germany's economy contracted last year for the first time in a decade. French consumer spending growth slowed in the fourth quarter and Italian consumer confidence dropped to a 10-year low in January.

Accelerating growth in the U.S. and Asia, coupled with the lowest borrowing costs in more than half a decade, lifted European economies in the fourth quarter. German exports rose in November and production gained for a second month.

The economy of the dozen euro nations will probably grow 1.8 percent this year, compared with 1.7 percent in Japan and 3.8 percent in the U.S., according to the European Commission. Germany accounts for almost a third of the euro economy.

``It's possible indeed that we will reach growth of 2 percent in Germany this year,'' Michael Rogowski, head of the BDI German industry federation which represents 107,000 companies including DaimlerChrysler AG, told reporters yesterday. ``This is on the condition that the euro-dollar exchange rate doesn't get totally out of balance.''

Last Updated: January 27, 2004 06:29 EST