Banc of America Securities yesterday downgraded AIB from "buy" to "market performer", citing its exposure to the US dollar. The bank also valued down two other banks, ABN Amro and HSBC, from "market performer" to "underperform".

Explaining the decision, Mr Chris Williams of Banc of America Securities said the bank estimated AIB's dollar exposure to be about a third of earnings.

He added that "the stock is also expensive, having had a speculative run", a reference to a rise in AIB share value on rumours of a takeover by the Royal Bank of Scotland or Bank of Ireland.

The US dollar extended its losses yesterday to a fresh 3½-month low against the euro over concerns about the lacklustre strength of the US recovery.

Despite roaring out of recession in the first quarter with 5.8 per cent annualised growth, business pessimism in the US is restraining capital spending, oil prices are unstable and the Dow Jones has fallen below the 10,000 mark for the first time in two months.

"There are concerns that US equities and the dollar are looking expensive, as American companies generally did not paint an encouraging picture of the second quarter, and this is going to have a knock-on effect on Europe," said Mr John Hatherly, head of global analysis at M&G Asset Management.

Mr Williams said there was shorter term concern about the US dollar due to worries about the strength of the US recovery, expected returns on US assets and the large US funding dependence on overseas investors.

"There also seems to be a view in certain quarters that the dollar is structurally overvalued and all that is needed is a catalyst to lead to a steady devaluation.

"We believe this carries two main implications for the European banks sector - reduced demand for higher risk bank stocks and specific weakness in bank stocks whose earnings are derived substantially from dollar or dollar-linked regions."

Strong crude oil prices and higher interest rates could affect the prospects for a global economic recovery and affect EU companies' earning. "Compared to US companies, European firms are more diversified internationally, particularly in the consumer products area," said Mr Clive McDonnell, European strategist at Standard & Poor's. "A stronger euro will hit those earnings."