Weekend comments from John Snow, US Treasury secretary, reinforcing the view that Washington was happy with a weak dollar sent the euro back within striking distance of its launch rate against the US currency.

The dollar fell to a four-year low at $1.1738 against the euro, but subsequently pulled back to $1.1675.

That was just shy of the euro's 1999 starting rate of $1.1747. It closed at $1.1647 in New York.

In Tokyo, traders said the Bank of Japan was seen repeatedly buying the dollar as the US currency hit a two-year low of Y115.10. I

subsequent European trade, the dollar rebounded to Y116.74.

Merrill Lynch's foreign exchange strategy team said yesterday the biggest surprise in foreign exchange this year has been the speed of the dollar's decline rather than the direction.

"Investors are left with three choices: the dollar's adjustment is now reaching an end; the currency is headed for a long period of consolidation before its next leg down; or the depreciation is expected over a shorter period of time," the investment bank said.

"We believe the third of these options is the right one." Abhijit Chakrabortti at JP Morgan forecast the dollar to continue weakening to $1.20 against the euro by the end of the year.

James Barty at Deutsche Bank estimated that with the euro having already risen from last year's average to $1.15, European corporate underlying earnings would be hit by almost 8 per cent.

Wall Street gave ground in response to the dollar's misfortunes. By midsession, the Dow Jones Industrial Average had lost 1.9 per cent.

European equities were lower, with blue chip exporters again bearing the brunt of the strong euro. In early evening trade, the FTSE Eurotop 300 index was down 3.4 per cent. In Dublin the ISEQ fell by 2.3 per cent.

Frankfurt was a sharp underperformer after the International Monetary Fund said Germany was at high risk of deflation.

The Xetra Dax index tumbled 4.6 per cent, its biggest fall for almost two months.

In Tokyo, the Nikkei 225 Average fell almost 1 per cent.

So far the depreciation of the dollar has benefited the US.

Some had feared that the currency's slide would provoke a stampede of international investors out of the country, pushing up interest rates and reversing the monetary easing of the Federal Reserve.