The euro has risen to two-month highs against the dollar as the money markets look to a recovery in the German economy.
The euro closed at its highest level since May 26th at $1.0645, more than 4.5 per cent up on its all-time low of $1.0104 hit fewer than two weeks ago.
Earlier in the session it had risen to its highest point since May 19th at $1.0724.
Dr Dan McLaughlin, chief economist at ABN Amro, said the sheer demand for euros once the currency began to turn as traders were caught "short" drove it up more quickly than many had expected.
Demand was also driven by expectations that economic activity in Germany, Europe's largest economy, is picking up. Such talk was triggered after a stronger-than-expected rise was reported last week in the Ifo economics institute's west German business climate index. Yesterday, German state consumer price data further stoked such speculation.
Data released yesterday showed consumer prices in North-Rhine Westphalia rose by a larger-than-expected 0.5 per cent in July and were up 0.8 per cent from a year earlier.
The dollar has also suffered in recent days from losses in the US stock and bond markets amid concern that foreigners quitting the asset market would sell dollars. Dealers continued to react to comments about a possible asset price bubble, voiced last week by Federal Reserve chairman Mr Alan Greenspan.
Comments from the new US Treasury Secretary, Mr Lawrence Somers, that the US had not abandoned the strong dollar policy did little but add to a small amount of profit-taking. He also warned about possible interest rate rises if inflationary pressures returned to the economy.
Mr Greenspan is due to make another address to the US Congress tomorrow.
According to Dr McLaughlin, at a technical level the currency looks a little overbought at $1.06.
"It may well come back again on Thursday if US GDP and employment data on that day prove benign, particularly if that leads to a reversal of the stock market falls."
He would not rule out the euro once again testing parity with the dollar over the next couple of months. "What is interesting is how much of the euro's weakness is cyclical and how much structural. It looks as though Germany is heading for a cyclical upturn but it could be that underlying structural problems will prevent it from rising too far."
However, according to Mr Jim Power, chief economist at Bank of Ireland, we have seen the turn in the euro. He pointed out that, because the whole market was positioned for a run to parity, it did not take very much to turn the tide.
"There is now an irrational level of enthusiasm for the euro which could drive it higher over the coming days but ultimately it will be comfortable around $1.05."
Above that, it would be likely to harm German business confidence, he said. However, he added it is unlikely to mean interest rate rises despite the warning by the president of the ECB, Mr Wim Duisenberg, that a bias to tighter policy was starting to creep into his thinking.
Mr Mark Cliffe of ING Barings agreed, saying: "The markets have to some extent extrapolated what is happening in the US to Europe. I don't really see the kind of vigour in growth or the momentum in inflation that will cause the ECB to raise interest rates.
"They would have to have strong supporting evidence that inflation was picking up, and I don't see that happening. That remark of Duisenberg's was purely motivated by an attempt to talk up the currency. Now they are succeeding, I suspect talk of a tightening bias will melt away," he added.
