The dollar managed to recoup some ground against the euro yesterday having hit three-year lows last week.

The euro pulled back slightly from the $1.058 level hit on Friday and by the middle of New York trading stood at $1.055. In Europe, the euro closed at $1.0537.

The dollar has been undermined by a combination of worries over war on Iraq and uncertainties over North Korea and fears about the US recovery.

Although the US is expected to outpace the euro zone and Japan this year, most of the growth is expected to come from government spending and the consumer.

Business investment, which has attracted waves of foreign capital since the mid-1990s, is expected to be modest.

If these inflows slow, the US will struggle to finance its current account deficit.

Dollar bulls hoping that US economic data this week, including retail sales, will help ensure that the greenback regains its footing.

Recently even the dollar's most loyal friends have been deserting it.

ABN Amro, which has been sceptical of the euro's ability to rise against the dollar, is now taking a more downbeat view of the dollar's prospects.

Its bearishness is not based on expectations of large sales by international investors, but rather on the growing temptation to hedge dollar risk by selling the greenback forward.

The incentive to hedge against a further fall in the dollar has become quite compelling. The euro value of the S&P 500 fell by 35 per cent in 2002 compared with a fall in its dollar value of 23.4 per cent.

Many fund managers are now fretting that this currency loss may be repeated in 2003. The cost of hedging the dollar is cheaper than in many years.

This is due to the fact that US interest rates are below euro-zone rates and are now much closer to rates in Japan and Switzerland.