Dollar gains strength on positive data from the US

Economists said the tide could be turning against the euro yesterday, as it hit a four-month low against the US currency, falling through the $1.10 level.The move came as markets reacted to positive indications about the US economy and more downbeat news from the euro zone.

It was encouraged by a steady outflow of Japanese money from the European fixed-income markets as Japan's rising bond yields once again proved attractive for domestic investors.

Bank of Ireland's chief economist, Dr Dan McLaughlin, said the shift, which brought the euro below the crucial technical level of $1.1059 in early trade, could be the start of a reversal in dollar weakness. He believes that the euro could sink back to $1.05 by year-end.

Such a drop, if coupled with a fall against sterling, would significantly allay the pricing pressures faced by Irish exporters over the past year.

Dr McLaughlin pointed to the dollar's strength against the Swiss franc, a traditional safe-haven currency, as evidence of the market's view that the US recovery is "getting legs".

Encouraging US unemployment data, issued yesterday, contrasted with confirmation from Germany that its economy shrank by 0.1 per cent in the second quarter of the year.

The news fuelled a sense in the markets that the world is heading for another period of unbalanced growth, with the US leading a strengthening global recovery and Europe lagging.

The euro fell to its lowest level since April, dropping to just above $1.09 at one point.

There was further good news for the dollar yesterday, with first-time applications for unemployment benefits falling last week in the US to their lowest level since early February, according to the Department of Labour, which said weekly initial unemployment insurance claims fell to 386,000 last week from an upwardly revised 403,000 in the previous week. The less-volatile four-week moving average was below the 400,000 mark for the third consecutive week.

"It looks like we are seeing a stabilisation in the labour market, and that is very important because, as the economy was accelerating in the second quarter... the labour market was still decelerating," said Ms Diane Swonk, chief economist at Bank One. "It is time to put the champagne on ice - just don't pop the cork yet."

Ulster Bank financial markets economist Mr Niall Dunne was also sceptical, particularly on dollar strength.

He sees the latest rise in the dollar as a correction in an otherwise positive trend for the euro, which he expects to finish the year at $1.15 as the world's largest economy remains unbalanced.

Mr Dunne said it was hard to see how the dollar could escape "the two large weights" created by the burgeoning US current account deficit and the US government's professed "strong dollar" policy.

He believes the current move will bring the dollar back no further than $1.08 against the euro. - (Additional reporting, Financial Times Service)