The euro stormed to a record high against the dollar yesterday, rattling European stock markets amid fears the single currency's surge could cut short the fragile export-led recovery now under way in the euro zone.

The rise took the euro to $1.2015, its highest level since its launch in January 1999, before it slipped back to $1.1988 in sparse trading.

Traders said the single currency's gains came as mounting concern over the scale of the US current account deficit, fears of trade disputes and geopolitical jitters weighed on the dollar.

The dollar's latest stumble, which took it to five-year lows against sterling and a near seven-year low against a trade-weighted basket of currencies, came despite optimistic economic data from the US.

But analysts said the movement of the US currency was no longer being driven by growth fundamentals. "All the focus is on the deficit now," said Mr Luigi Buttiglione of BlueCrest Capital.

Currency analysts said the euro could rise towards $1.25 in coming months.

"We expect the euro to peak about the time the US recovery improves to the extent of producing sufficient jobs to prompt the Federal Reserve to raise rates," said Mr Ashraf Laidi, chief currency analyst at MG Financial Group in New York.

The euro took heart from further signs of the euro-zone's improving health. The European Commission said its economic sentiment index jumped to its highest level in 18 months.

But economists warned a further strengthening of the euro could stifle the first signs of revival in the euro zone. Recent gross domestic product figures showed Germany and France were dragged along by a rebound in exports.

"In dollar terms, the euro is up 15 per cent on the year... in trade-weighted terms about 8 per cent. That will weigh on the recovery next year," said Mr Rainer Guntermann of Dresdner Kleinwort Wasserstein. - (Financial Times Service)