* Euro hits fresh 2-year high
* Dollar index sets fresh 8-1/2-month low
* German Ifo data in focus, could lift euro further
* But chart resistance seen for euro at $1.3833
LONDON, Oct 25 (Reuters) - The euro rose to a two-year high against a weak dollar on Friday before a German sentiment survey that, if it points to a strengthening recovery, could boost the single currency further. The dollar fell broadly, hitting its lowest in nearly nine months against a basket of currencies on expectations of continued monetary stimulus from the the U.S. Federal Reserve. The euro was up 0.1 percent at $1.3816 having hit $1.3833, its strongest since November 2011. Friday's $1.3833 peak coincided with the 61.8 percent retracement of the euro's fall between May 2011 and July 2012, which technical analysts said could offer stiff resistance. Analysts said a strong German Ifo reading at 0800 GMT could help the euro, though scope for gains may be limited. The business climate index is expected to rise to 108.0 from 107.7.
"Even if the Ifo is a positive surprise it won't change the ECB's expansionary stance and it may have a limited impact on the euro," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt. "There is still a theme of general dollar weakness and euro/dollar is more of a dollar story. With disappointing U.S. data you could see Fed tapering expectations pushed far into next year." The euro shrugged off data on Thursday showing the pace of growth in euro zone business unexpectedly eased this month as the recovery remains fragile elsewhere as well, with U.S. manufacturing output dropping for the first time in four years.
There are concerns that the U.S. economy may have been hit hard by the 16-day government shutdown earlier this month, leaving the central bank reluctant to reduce monetary stimulus any time soon. The dollar index was down 0.1 percent at 79.124, having dropped to 78.998, its lowest since early February. Some analysts said the euro could be vulnerable to any signs of the euro zone's tentative recovery losing steam, especially with the currency's trade-weighted index at a two-year high. "Worse than expected euro zone and better than expected U.S. data could underscore the downside risks for euro/dollar at current levels," Citi currency strategist Valentin Marinov said in a note to clients. Against the yen, the dollar set a two-week low of 96.94 yen and last stood at 97.01 yen, down 0.3 percent on the day. Expectations for continued Fed stimulus have caused U.S. bond yields to fall, eroding the dollar's attractiveness compared with the yen. But with the 10-year Japanese government bond yield slipping below 0.60 percent on Thursday for the first time since May 9, the yen could weaken on speculation that Japanese investors will step up their overseas investments.