The euro reached a 17-month high against the dollar and a five-month high against the yen yesterday as investors' concerns over the strength of the US economy were underlined by a Federal Reserve report showing a patchy economic recovery. The single currency briefly topped $0.95 before dropping back to $0.9461.
The US currency found itself on the defensive after US equity markets racked up new losses overnight amid concern about prospects for the US economy and the threat of renewed terrorist attacks.
The dollar's fall yesterday was followed by the release of the beige book, anecdotal accounts from the Fed's regional offices, which characterised US economic growth as modest and uneven during late April and May.
The report said that while some sectors showed signs of improvement, "others softened or remained weak". The tone of the report appeared to mark a downward shift from the previous beige book in March, which had reported a more positive mood across almost the whole country.
With investors cutting back their exposure to US assets, the euro has been reaping the benefit recently, analysts said.
From its introduction on January 1st, 1999, at around $1.17, the euro lost almost a third of its value against the US currency. But, after falling to an historic low of $0.8230 in October 2000, it has clawed its way back recently, raising expectations that it might even regain parity with the dollar.
"We would expect the dollar to drift lower over the next year or two," said Mr Dan McLaughlin, economist with Bank of Ireland Treasury. "We have revised our view in relation to the dollar. We were predicting that the euro would trade in an $0.85 to $0.95 range against the dollar. We now think over the next year, the range is going to be $0.90 to parity."
Mr Austin Hughes, an economist with IIB, said it was difficult to gauge when the euro would reach parity with the dollar and it could depend on several factors.
"It seems to be possible to imagine that the dollar could move towards parity over the summer, certainly by August, if we get this persistence of negative sentiment to the US," said Mr Hughes.
Recent comments from a senior German economic adviser said the German economy would only be endangered by the euro moving significantly above $1.10.
The Irish economy would also be comfortable within this range, said Mr Hughes.
"A lot depends on the speed at which it happens and where it ultimately is headed. I think we could probably be comfortable enough in this economy with a euro around the $1 to $1.10 level," he said.
