Euro-dollar rate at four-year high

The euro yesterday soared above its launch level against the dollar for the first time in more than four years, putting the European Central Bank under intense political and economic pressure to cut interest rates.

The euro's surge from $1.05 at the beginning of the year to above $1.18 yesterday is hitting eurozone exporters, exerting an additional drag on the region's economy, which is already on the brink of recession.

The continuing weakness of the dollar was given additional impetus last week after remarks from US treasury secretary John Snow which seemed to imply a weakening of the longstanding strong dollar policy.

European business leaders and politicians have expressed concern about the rapid appreciation of the single currency, which opened at $1.1789 in 1999 but subsequently slumped to just above 82 cents.

Earlier this week France's economy minister, François Mer, said a cut in interest rates "could help the restabilisation of the exchange rate".

The German employers' organisation, the BDI, said it was worried by the euro's rise, and companies like Volkswagen, Europe's biggest car maker, have warned that the euro's strength is hitting profits.

Mitul Kotecha, the head of forex strategy at Credit Agricole Indosuez in London, said the euro-dollar exchange rate was now at what many considered "fair value", but added: "The potential for overshoot is dramatic. There is no reason to stop at $1.18." If it were to overshoot on the upside as far as it had during the euro's decline, it could rise to $1.30-40, he said.

Analysts are expecting the ECB to cut rates by up to a half of one percentage point next month, arguing the stronger euro is exerting downward pressure on inflation, giving room for manoeuvre.

Yesterday German officials tried to play down speculation that the G8, due to meet next month, will seek to stem the euro's rise against the dollar.