The euro was pulled below $1.20 against the dollar for the first time in four months yesterday as the market latched on to signs of growing recovery in the US economy.
Reports that the board of the European Central Bank (ECB) could be split on moving euro-zone interest rates did little to support confidence in the euro as dollar optimism increased, with the euro slipping to $1.198 in early afternoon trade.
The markets focused on a Daily Telegraph report that ECB chief economist Mr Otmar Issing and Netherlands central bank governor Mr Nout Wellink had blocked a rate cut at last Thursday's council meeting, against the wishes of ECB president Mr Jean Claude Trichet.
Market sources believe the report has some basis, although the extent of the split is unclear. The compromise reached at the meeting appeared to be that further data would be examined before deciding on whether to cut euro-zone borrowing costs.
The latest bounce in the dollar started last Friday after payrolls data showed that job creation, regarded as the missing piece in the US recovery, had been surprisingly robust in the first quarter.
With this last piece of the recovery in place, investors turned their thoughts to interest rates, which some believe could now rise in advance of November's presidential election. If this happens, it will automatically boost the dollar since it will raise the returns on offer to those investing in the US.
Dollar sentiment is expected to be further enhanced by buoyant earnings from US companies in the forthcoming first-quarter reporting season.
"The momentum is behind the dollar just now," said Mr Niall Dunne, financial markets economist with Ulster Bank. "Interest-rate expectations have changed on the back of the jobs figure."
Mr Dunne is not convinced that the pressure on the euro is fully justified, however, believing that fundamental economic considerations - including the trade and federal budget deficits - are still working against the dollar.
Mr John Moclair, head of domestic corporate sales with Bank of Ireland Global Markets, said the euro was undermined yesterday by a perception that consensus was beyond the reach of the European Central Bank's board at the moment.
He said any move below $1.20 would make hedging decisions less comfortable for dollar buyers, who had been enjoying a generally weaker dollar over the past six months.
ABN Amro foreign exchange economist Mr Aziz McMahon agreed that a large number of companies were sitting on large holdings of euros at a time when its value was falling.
"This is putting selling pressure on the euro," he said, acknowledging that major currency movements in a holiday week such as this one may not carry much long-term significance.
