Euro continues to strengthen against dollar

HOPES THAT the euro has turned the corner were bolstered yesterday after the currency surged above $1.05 to hit a one-month high against the dollar.

The euro hit a high of $1.0525, 4 per cent above last week's lifetime low of pounds 1.0104, and put more clear blue water between parity with the dollar. A break above $1.0558 would take the euro to its highest level in two months. The currency also surged to a three-month high against the pound as enthusiasm for the European currency outweighed fresh evidence UK rates may have troughed.

Demand for euros has risen sharply following the stronger than expected German IFO survey of business confidence, which confirmed euroland's economy is picking up. "This survey was consistent which what has been going on in Germany for a number of months but the IFO was the straw that broke the bear's back," said Alison Cottrell, chief economist at PaineWebber.

Meanwhile, weak US June housing starts reinforced a softer environment for the US economy and compounded the negative dollar sentiment produced by Tuesday's US trade data. While the gains of the last few days have been driven by positive sentiment on euroland, a shock from the US - such as an inflation warning from Alan Greenspan, chairman of the US Federal Reserve, in today's Humphrey-Hawkins testimony to Congress - could spike up the dollar.

Ms Cottrell said the surge in the euro was not a "blip" as there had been a fundamental change within the euroland economy, but warned it could suffer another fall and risk hitting $1. She said the euro would stick around the the $1.05 mark for some months before attempting a climb towards $1.08. The euro was launched on 1 January at about $1.17.

A poll of City economists by Reuters found that odds of the euro avoiding parity had risen from one-third to two-thirds. But they said the currency would have to pull further away from parity at least until the autumn before they could be confident it was out of danger.

Against the pound, the euro rose to 66.78 pence, its highest since 15 April. "Euro/sterling is at the moment a function of euro/dollar," said Michael Metcalfe of NatWest Global Markets.