The dollar plumbed a 16-month low against the euro, hit by heavy sales on Wall Street as faith in US corporate management faded further. The latest decline prompted Ifo president Mr Hans-Werner Sinn to predict the euro was likely to hit parity with the US currency by year-end.
News the chairman and chief executive of US conglomerate Tyco International Mr Dennis Kozlowski had resigned unexpectedly and that the treasurer of energy firm El Paso had died in an apparent suicide helped knock US stock indices down 2-3 per cent on Monday.
Yesterday morning, the dollar dropped over a further third of a per cent to $0.9453 on the euro, not helped by news that Mr Kozlowski had been indicted for tax fraud. It closed European trading hours at $0.9420.
Against the Swiss franc it eased over half a per cent on the day to 1.5535 francs, while against the Australian dollar it hit its lowest level since September 2000.
The dollar's weakness continued to have repercussions in other currency crosses, helping the euro rise to its highest level against sterling since October 1999, at £0.6445.
The euro has now gained more than 5 per cent against sterling since December and almost 6 per cent on the dollar.
Sterling has gravitated closer to levels at which analysts think the British government would be prepared to lock the currency into monetary union with the euro zone.
Analysts consider £0.67 a realistic level for Britain to join the European Monetary Union.
It was only against the yen that the dollar managed to hold its ground, and then only because of a fresh burst of intervention by the Bank of Japan. Yen sales helped push the dollar from Y123.4 to Y124.2.
There has been a mounting consensus in the foreign exchange market that the end is fast approaching for the dollar's six-year bull run.
But there was some incongruous data on US capital flows yesterday. In the first two months of the year, inflows into the US appeared to be drying up, with net inflows of $9.65 billion and $14.94 billion respectively covering only a fraction of the current account deficit.
In March, however, the net inflow was a staggering $79.92 billion. Of this, only $7 billion went into US equities, with $14 billion going into Treasury bills and the balance being invested into corporate and agency bonds.
The data do not sit comfortably with the argument made by many strategists that investors are increasingly sceptical over US assets.
Analysts said that many investors in US assets might simply be buying in order to stay close to benchmarks.
"The assets held by European pension funds continue to grow," said Mr Marc Chandler, chief currency strategist at HSBC in New York. "These funds are often compelled to buy US assets in order to continue to diversify."
An increasing proportion of these investments were likely to be hedged to protect against dollar weakness, Mr Chandler added.
For the euro's part, traders and analysts were still not proclaiming any intrinsic strength in the single currency itself but expected it to continue to benefit from loss of confidence in the dollar and dollar asset markets.
European finance ministers meeting in Luxembourg cheered the euro's gains but stressed the need for stability, saying it was finally realising the upward potential they have often promoted.
