Euro expected to make further gains against the dollar

The euro is expected to make further gains in the coming days, having broken parity with the dollar yesterday for the first time in two years.

Continuing uncertainty about the health of the world's largest economy and the US stock market in particular are expected to underpin the currency's gains.

The euro closed at $1.007 in Dublin last night and at $1.009 in New York, where it is expected to test $1.02 in the short term. "It has more to do with dollar weakness than euro strength," said Mr Alan McQuaid of Bloxham Stockbrokers. The euro also notched up gains against sterling, closing at 64.3p compared to 63.9p yesterday.

Attention is expected to focus today on the testimony of the Federal Reserve chairman, Mr Alan Greenspan, to the US Senate Banking Committee.

The markets will be hoping against hope that his comments on the US economy will reassure increasingly nervous investors. "He is not going to be able to say that there is not another Enron or WordCom out there," predicted Mr McQuaid.

Further dollar weakness is predicted, but a dramatic fall is not expected for a number of reasons. The nascent economic recovery under way in Europe is export-led and vulnerable to a weak dollar, which will make European goods more expensive in dollar terms.

In addition, the prospects for the US economy are more favourable. "Long term, the US economy is a better bet. European growth is weaker and budgetary policy is restrictive. In addition, the ECB is prone to raising rates," according to Mr McQuaid.

The euro's ascent above parity is "a good psychological boost for the euro zone", according to Mr Niall Dunne, economist with Ulster Bank. "It makes inflation less of an issue and will contribute to keeping interest rates down," he said. The reasons underlying the speed at which the euro had passed out the dollar were worrying, he added.

The euro is not expected to return to the $1.17 level at which it made its debut in 1999 unless the US authorities decide to let the dollar fall to boost the US economy's competitiveness. Intervention from other central banks is expected long before this happens.

A euro-dollar exchange rate of $1.10 is seen as the highest that can be tolerated before the damage to the euro-zone economy outweighs the benefits. Irish industry is particularly vulnerable and could encounter problems at a lower rate, according to Mr Dunne. However, there would be counter-balancing benefits for the US-owned multinational sector.

The euro's rise above dollar parity was welcomed by Mr Gerassimos Thomas, the European Commission spokesman of economic and monetary affairs. "The euro has long been undervalued compared to the macroeconomic fundamentals of the euro area.

"A strong euro is in the interests of the euro area, notably due to its positive effects in keeping inflation under control and in underpinning domestic demand," he said.