BMW, the German luxury carmaker, has stopped all long-term hedging of the dollar, calling an end to the US currency's two-year decline.

The carmaker is one of Europe's heaviest users of currency hedging to protect its revenues from volatile foreign exchange markets. But it now believes the US currency is "significantly" under-valued and must bounce back.

The dollar has fallen by 29 per cent against the euro in the past two years, pricing many European exporters out of US markets. As the US currency approached the $1.30 mark against the euro earlier this year, European politicians clamoured for a cut in interest rates to make the euro zone more competitive.

BMW said it believed the "correct" value for the dollar was $1.10 to the euro compared with the $1.22 level it reached in late trading yesterday. But the firm could be premature in its belief in a dollar rebound as few strategists are confident of a dollar bounce in the near-term. In spite of stronger US growth, currency traders remain concerned about the twin US deficits.

Mr Bob Sinche, head of currency strategy at Citigroup, said the "panic mentality" that set in as the dollar fell rapidly late last year was diminishing, but few companies seemed to be ready to go completely unhedged.

"We have not seen a lot of discussion [from companies\] about whether the process of dollar weakening has come to an end," he said. "The general notion remains one of concern about the dollar on a medium-term basis and, therefore, corporates are using periods of dollar strength to put on some hedging."

Volkswagen, Europe's biggest carmaker, increased its hedging at the end of last year after the falling dollar knocked €1.2 billion from annual profits.

Pension funds buying US assets appear to be reducing their level of hedging, however. "There are indications that institutional [pension fund\] investors do not seem as keen to hedge their dollar exposure as they were in 2003 or even 2002," said Mr Michael Metcalfe, currencies strategist at State Street Bank.

BMW said it was limiting its use of derivatives to protect against the weak dollar to short-term "buying on the dips".