Worries over the imminence of an Iraqi conflict combined with bleak US economic data yesterday to push the euro over $1.06 for the first time since late 1999.
The move, following a year of dollar losses, saw the euro rise to $1.0679 in early trading before settling back to close at $1.0652, up 0.8 per cent on the day.
Analysts agreed that a step above $1.07 could come next week, as indicators on the US recovery remain unimpressive and predictions on war in the Middle East gain credence.
Mr Aziz McMahon, foreign exchange analyst with ABN Amro in London, expects the euro to climb to $1.09 within about three months as concerns persist about the fundamentals of the US economy. Within the last week, the markets have digested poor job-creation numbers, weak industrial-production data and a slide in consumer confidence.
More worrying, however. has been news of a widening US trade deficit, a factor viewed by many as the dollar's biggest problem.
Davy chief economist Mr Robbie Kelleher said the increasingly warlike stance of the American government may be weighing on the dollar on a day-to-day basis, but he believes financing the $40 billion (€37.5 billion) US deficit is the source of most pressure. The dollar has lost about one-fifth of its value against the euro over the past 12 months. At this point last year, one euro was worth $0.88.
"Iraq tends to get blamed for everything," said Mr Kelleher, pointing instead towards US failure to attract the investment necessary to keep the deficit under control. Mr Kelleher considers the dollar's fall against the euro could extend as far as $1.20 before the end of the year. The euro launched against the dollar at $1.17 at the start of 1999.
The rise over the past year has been particularly disturbing for Europe's exporters, whose goods have become more expensive on world markets as the euro-zone currency has strengthened.
Within the Republic, this concern has been magnified by a persistently high rate of inflation, which peaked at 5 per cent last month and is expected to move higher over coming months.
About 60 per cent of the Republic's exports are sent outside the euro zone. "It's not good news for Europe unless the European Central Bank responds by compensating for the stronger currency," said Mr Kelleher, who believes the bank will soon cut euro-zone rates.
The European Commission yesterday welcomed the euro's gains against the dollar, however.
"It is a better reflection of the fundamentals of the European economy. It is welcome," said Mr Gerassimos Thomas, the Commission's spokesman on economic and monetary affairs.
Ulster Bank's financial markets economist, Mr Niall Dunne, expects the euro to continue strengthening against the dollar in the short-term, amid doubts about the "safe-haven" status of the US. - (Additional reporting Reuters)
