Euro beats $1.25 mark as dollar slide continues

The dollar hit a record low against the euro yesterday as investors saw little prospect of rising interest rates or a reversal of budget deficits across the Atlantic.

For the first time since its launch in January 1999, Europe's single currency broke through the $1.25 mark. Although the euro gave back ground slightly in afternoon trading to stand at $1.2481, analysts said the slide in the value of the greenback showed few signs of stopping.

The dollar has now fallen to a new low against the euro on 16 of the past 22 working days since hitting a new low of $1.20 against the euro on November 28th.

It was a similar story for the greenback against the British pound with sterling moving close to an 11-year high of $1.7760, before falling back to $1.7733.

Analysts said worries over low interest rates in the US and rising deficits - despite evidence of a return to growth - were the major drivers behind the fall in the value of the dollar.

Fears over global security and the recent outbreak of BSE at a US farm were also combining to hit confidence in the dollar.

Ms Lara Rhame, senior currency strategist at Brown Brothers Harriman in New York, said traders had been viewing the $1.25 mark as a "line in the sand" but trends suggested the dollar was set to continue its decline.

"We would expect small corrections at some point but by the middle of next year we would expect to see the dollar reaching $1.35 against the euro," she said.

Currency strategist Ms Jane Foley at Barclays Capital agreed the long-term data did not support hopes of a bounce back in the value of the dollar.

She forecast that any hike in US interest rates would not take place until June 30th, meaning the euro would remain attractive to investors for at least the next three months before markets began to factor in expectations of a rate rise.

"There is a generally held view that the Bush Administration has a nonplussed attitude towards the dollar. Officially they still have a strong dollar policy but no-one believes that any more - certainly not the markets," Ms Foley said.

"The dollar continues to be undermined by three principle factors," according to Mr Alex Beuzelin, foreign exchange market analyst at Ruesch International in Washington DC. "[These are\] relatively low interest rates, a record high current account deficit and the perception in the market that the Bush Administration is amenable to an orderly dollar decline."

"The market remains thin, so moves are exaggerated. But you can't get away from the underlying problems that are surrounding the dollar, particularly the current account deficit," said Mr Paul Robson, international economist at Bank One.

The US current account deficit, around 5 per cent of gross domestic product, is one of the biggest weights on the currency.

The euro's move against the dollar gathered pace after the German government said it was not worried about euro strength, adding there was no reason to consider measures to counter it.