The euro fell to six-month lows against the dollar yesterday as optimism grew about a quick turnaround in the US economy. Economists said recent testimony from US Federal Reserve chairman Mr Alan Greenspan and positive economic data from the US compared with the euro zone had improved sentiment toward the dollar.

Analysts said Mr Greenspan's cautious optimism before the Senate Banking Committee contrasted with Italian inflation data, which further dampened hopes for a growth-boosting interest rate cut by the European Central Bank.

"People think the outlook for the US economy is looking more optimistic after Mr Greenspan's comments," said Mr Stuart Green, European economist at Crédit Lyonnais. By the close of business in Dublin yesterday, the euro had fallen to 86.45 US cents, down 1.35 per cent from its previous close and its weakest level since last July. Some analysts expect a near-term test of the euro's record lows of 82.25 US cents set in October 2000.

"We have seen the first decisive move of the new year after the stagnation that prevailed in the euro/dollar exchange rate following the September 11th attacks," said Mr Aziz McMahon, foreign exchange strategist with ABN Amro in London.

He expects the euro's exchange rate to come under further pressure in the days ahead, dropping toward the 85 US cent level.

The single currency was not helped yesterday by data showing Italian inflation in January was seen coming in little changed at 2.3/2.4 per cent year-on-year compared with 2.4 per cent in December. These figures provided the first indications of inflation within the euro zone in January.

There had been fears that Italian inflation would be fuelled by price rounding-up with the introduction of the euro currency on January 1st. "The market is basically buying into a US recovery. So far there is little sign of improvement in the economy in the euro zone and absolutely none in Japan," said Mr Lee Ferridge, head of global currency strategy at Rabobank.- (Additional reporting by Reuters)