The dollar fell further against the euro yesterday, amid signs that market sentiment was turning.

It fell sharply during Asian trading, made vulnerable by fears of a prolonged US economic slowdown. And a recovery during European trading was snuffed out by a Philadelphia Federal Reserve survey showing business conditions worsening. That cancelled out support for the dollar from other US data yesterday, which showed low consumer price inflation, a rise in new homes being built and a fall in jobless benefit claimants.

The US currency ended European trading at $0.913 against the euro and Y120.2 against the yen, nearly 4 per cent lower than a week ago. It also fell against sterling.

Even news that growth in Germany was stagnant in the second quarter could not hinder the euro's ascent. The Bundesbank sought to calm European nerves after GDP figures showed 0 per cent growth in the second quarter and growth of only 1 per cent on the same period a year earlier.

It said Germany was not heading for recession, adding that it expected to see an economic recovery later this year and into next year, on the back of tax cuts and falling inflation.

In the US, consumer prices fell 0.3 per cent in July from June, the sharpest drop in 15 years, official figures released yesterday showed, paving the way for yet another rate cut next week.

Dragged down by sharply-lower energy costs, the consumer price index took its biggest tumble since April 1986 and the first drop since April 2000, the Labor Department reported.

Core consumer prices, which exclude volatile energy and food costs, rose 0.2 per cent.

Mr Michael Rosenberg, global head of foreign exchange research at Deutsche Bank in New York, said: "We have seen signs that other currencies are beginning to join in the party."

A sustained fall would test the US administration's policy towards the dollar. A possible trigger for the latest downward move was a CNBC television interview on Wednesday night by Mr Paul O'Neill, US treasury secretary, in which he failed to use the expression "strong dollar".

Mixed messages from the Bush administration contrasted with the mantra from former US treasury secretaries Mr Robert Rubin and Mr Larry Summers that a strong dollar was in the US interest.

But few participants in the currency markets thought Mr O'Neill's comments were the underlying reason for the dollar's fall.

"What is really happening is that any talk about the dollar causes markets to refocus on the old arguments that had supported the dollar, realise they no longer exist and attack the currency," said Mr Sassan Ghahramani, a senior analyst at the consultancy Medley Global Advisors in New York.

Investor concern that the dollar is overvalued was heightened by recent data showing US productivity growth over recent years lower than previously thought questioning the extent of the US economic miracle.

"Fewer and fewer people now believe in a swift US economic recovery," Mr Ghahramani said. Many analysts believe a steady fall in the dollar against the euro would be welcomed by US and euro-zone policymakers.