Record gain for dollar on euro

THE US dollar has posted its biggest weekly gain against the euro following indications that economic growth in Europe's leading market is stalling.

The euro fell to a four-month low of just $1.09 yesterday, a 9% drop since it reached $1.1933 earlier this year.

Figures released yesterday show the major economies of the eurozone are sliding deeper into recession, with French GDP declining by 0.3% in the second quarter compared with growth of the same figure in Britain, which is outside the eurozone. Four other European countries Germany, Switzerland, the Netherlands and Italy are now in recession, whereas the US economy is showing signs of a recovery.

Optimism over the US economy was reinforced by the Federal Reserve Bank of Philadelphia on Thursday. It found that factory activity in the mid-Atlantic region reached a five-year high in August, indicating that the US manufacturing sector could be on its way to recovery. Niall Dunne, financial markets economist at Ulster Bank, says it is likely the euro will end the year trading at $1.05 against an earlier forecast that it would end the year at $1.15.

"If you take the $1.05 view, you can argue the US economy is growing faster than the eurozone, thanks to massive tax cuts and historically low interest rates," he said.

"On that basis, US equities will likely outperform euro area stocks, and yields on US bonds, which attract long-term foreign investors, will continue to rise and attract capital inflows."