A sharpening dip in the US dollar unnerved global markets yesterday as investors sought to protect themselves from the possibility of sustained dollar weakness.

As US markets were closing yesterday, the euro stood at a 19-month high of $1.309, up 1.2 per cent, while sterling gained 0.9 per cent to a 1½-year peak of $1.9333. The yen climbed 0.5 per cent to Y115.66.

The dollar's fourth consecutive session of weakness was the culmination of a host of negative developments over the last several weeks, including weaker-than-expected US economic data and comments from central banks in Asia and the Middle East underscoring the risk of keeping large reserves of dollars.

"It is the aggregate accumulation of these bearish bits and pieces that has the dollar on the defensive," said Dennis Gartman, an independent investment advisor who writes the Gartman Letter.

European and Asian stock markets suffered the fallout from the dollar's decline with exporters to the US the worst performing stocks in all regions. But on commodity markets, dollar-denominated prices tracked higher as gold, copper and oil became cheaper in other currencies.

The euro's strength could put the European Central Bank under fresh political pressure not to raise interest rates again after the expected quarter percentage point rise to 3.5 per cent on December 7th.

The dollar has now fallen this year by more than 10 per cent against the euro and 12 per cent against sterling. Some economists suggest the greenback has further to slide, given a weak economic outlook in the US and the prospect of interest-rate cuts there next year.

Steve Saywell, currencies analyst at Citigroup, said: "While the economic data remain soft, the dollar will continue to fall."

The gaping US trade deficit, the near certainty of a December rise in euro-zone interest rates, rising expectations of a cut in US rates in the spring and wariness about borrowing in yen to finance investments in the US all continued to weigh on the dollar, analysts said.

These concerns were heightened by comments from Wu Xiaoling, deputy governor of the People's Bank of China, indicating her unease at the rapid build-up of $1,000 billion of reserves in China.

She said Asian foreign exchange reserves were at risk from the dollar's fall, although she stopped short of indicating that China was about to stop adding to its pile of reserves.

"The dollar is coming under real pressure and this looks like the beginning of a sustained move," said Ian Stannard, strategist at BNP Paribas.