Weaker-than-expected employment data from the US helped drag the dollar to a 16-month low against the euro yesterday.

Although employment rose by 41,000 and unemployment fell from 6 to 5.8 per cent, there were steep downward revisions to previous payroll figures.

"It seems that traders wanted to sell the dollar even before the figures were released, but were waiting just in case it was a strong figure," said Mr Mark Austin, chief currency strategist at HSBC. "When the figure was released there was nothing to hold them back."

Analysts said the next target for the euro was $0.9595, the currency's high in January 2001. If the euro manages to push above this level, parity will be in sight. "This is now looking less like an interlude in the dollar's rally and more like a change in the trend," said Mr Laurence Cantor, head of currency research at JP Morgan Chase.

"It has only been the Bank of Japan that has been supporting the dollar in recent weeks," he added.

If a reminder was needed of why Japan needs a weak yen, yesterday's gross domestic product data provided it.

On the surface, the data were reassuring. In the first three months of the year, the Japanese economy grew by 1.4 per cent, outpacing the US in the quarter.

But beneath the strong headline figure, the data served to underline Japan's unhealthy dependence on the export sector. The surge in demand for Japanese goods made up half of the overall growth - the largest contribution exports have ever made. The government sector contributed 0.5 per cent to the figure, with 0.3 per cent coming from the domestic private sector.

"This is still a very weak economy," said Mr David Bloom, currency strategist at HSBC in London. "Only exports are keeping the economy standing."

The growth only partially offset contraction in the previous three quarters. In the fiscal year 2001-02, the economy declined by 1.3 per cent, the largest fall since the series began.