The euro's brief recovery on foreign exchange markets appeared to be over last night as the dollar soared on a wave of optimism that the booming US economy is heading for a soft landing. The decision to raise US interest rates by half a percentage point on Tuesday persuaded many investors that the Federal Reserve will prevent inflation from wrecking the American boom.

The euro fell by about a cent in European trade yesterday, to 89.5 cents against the dollar - just a cent above its record low last week. The European currency also lost ground against sterling, falling below 60p for the first time in more than a week.

Market analysts expect the euro to fall further as the prospect of continued strong growth and low inflation makes the US a more attractive destination for investment. With US interest rates almost 3 per cent higher than in the euro zone, the European Central Bank (ECB) can do little to boost the euro. And there are growing signs that Europe's central bankers have rejected the option of intervening in the markets to prop up the currency.

The president of the North German State Central Bank, Prof Hans-Juergen Krupp, yesterday became the fourth member of the Bundesbank council this week to reject intervention without the support of the US. Monetary policy strategists at the ECB acknowledge that there is little chance that Washington will agree to any move to devalue the dollar in view of the fact that the dollar's strength helps to keep down inflation.

Bundesbank president Mr Ernst Welteke said yesterday that the euro's weakness against the dollar was a temporary phenomenon that would pass once markets recognised how good the economic fundamentals in the euro zone are. He defended the ECB's recent increase in interest rates, despite the fact that figures released yesterday show that inflation in the euro zone has fallen below 2 per cent.

"By acting before the price spiral turns, the Eurosystem can avoid more drastic action later," he said.

Although most analysts expect the euro to remain weak in the short term, Mr Klaus Friedrich, chief economist at the Dresdner Bank, believes that this week's US interest rate rise will boost the euro in the longer term. If the US central bankers succeed in cooling down the economy, US growth will slow as the euro zone economies continue to recover.

"When that happens, the trend will turn for the euro. The only question is when," he said.