The euro slumped toward parity with the dollar yesterday and hit a record low against sterling, undermined by suspicion that the French central bank had blocked a foreign take-over of a French bank.
The dollar, meanwhile, gained from the latest raft of price data in the United States, which showed inflation in check, thereby averting fears of an imminent rise in US interest rates that some had feared might undermine Wall Street.
The pound has fallen below 79p against sterling and is heading for all-time lows. It closed at 78.7p against the British currency from 79.14p on Monday. At the same time the euro closed at $1.0055 in late trade from $1.0122.
According to Mr Jim Power, chief economist at Bank of Ireland, sterling is gaining from an improving economic picture while worries about Italian political stability are undermining the euro.
News on Monday that British input or commodity prices strengthened by the largest monthly amount since November 1994 also boosted sterling. Inflation came in around market expectations. The figures implied that the firm direction for British interest rates was upwards, Mr Power said.
By contrast, the euro was hit by nervousness that the Italian budget would not get through parliament. There were also rumours that the prime minister, Mr Massimo D'Alema, was threatening to resign after a small coalition partner demanded a new government in January with someone other than Mr D'Alema in charge.
Market analysts said the weak tone for the currency was set early in the London session after press reports that the Banque de France had expressed concern about the possible take-over of the French bank Credit Commercial de France.
"This helped to encourage the view that the major governments of Europe are showing an extremely unfriendly attitude to capital investment," said Mr Cameron Crise, currency strategist at Warburg Dillon Read.
Towards the end of London trading, as dealing thinned out from the unusually active morning, the euro staged a small recovery against the dollar as traders covered their shorts in the currency.
Although dollar parity with the euro was back in the market's immediate sights, few analysts were prepared to say that it was likely to drop more dramatically through the magic figure than during its first incursion.
However, according to Mr Power, the euro would be trading at 98 US cents within a month which would probably mean a rate of below 78p against sterling for the pound - an all-time record, he said.
