Dollar heads south again as post-war rally stalls

The dollar tested a new one-month low against the euro yesterday, as international investors continued to shy away from putting their money into US assets.

The US currency dropped sharply in early trade against the euro, falling briefly below the psychologically important $1.10 barrier before strengthening slightly to $1.095 in late European trade.

Most analysts predicted that the slide would continue over coming days however, as attention focuses increasingly on the underlying weakness of the US economy.

Mr Aziz McMahon, foreign exchange strategist with ABN Amro in London, said the dollar had now abandoned a brief post-war rally and was on course for sustained vulnerability.

He said the market felt "a general sense of disappointment" at the lack of depth in the rally of recent weeks, which did not lead to a fundamental shift in currency valuations.

"At this point, it's hard to see what could improve for the dollar," Mr McMahon said, adding that a substantial upturn in US economic data would be required before the US currency would strengthen.

ABN Amro believes that the euro will reach $1.13 over the next three to six months. A break through the euro's launch level of $1.17 is possible however, according to Mr McMahon.

He said such a movement would cause significant disquiet for European export businesses and would lend "credence" to comments made by senior European Union finance official, Mr Johnny Akerholm, yesterday.

Mr Akerholm, who chairs the Economic and Financial Committee (EFC) which prepares for EU finance ministers' meetings, told reporters that the rise of the euro would start to hurt Europe's economy at some point and this pain threshold was closer than it had been less than a week ago.

Mr McMahon said that such a move would be driven by the frailty of the US economy rather than euro-zone buoyancy.

Mr Niall Duggan, head of FX sales at Bank of Scotland (Ireland), believes that this fact will eventually weigh on the euro, as investors turn their attention to the feeble conditions that also prevail in the main euro-zone economies.

"The dollar is oversold to the point where it represents good value," he said yesterday, predicting that the US currency would gain strength over the second half of this year.