Euro hits three-year high against dollar

The euro rose to its highest level against the dollar in nearly three years today as jitters over North Korea’s nuclear programme helped push the dollar down.

The 12-nation currency reached 1.0364 dollars on European markets before slipping back to 1.0341 dollars by afternoon. Trading volume was light.

The peak was the highest since January 12, 2000, when the euro hit 1.0370 dollars.

Today’s rise was the latest stage in a rally that has seen the euro rise 17% from around 86 US cents in February – making holidays in Paris or Rome more expensive for American tourists, but offering relief to US manufacturers by making their goods cheaper in comparison with those of European competitors.

Kevin Harris, economist at market advisory firm MCM Inc. in New York, said that fears about worsening relations with North Korea had weighed on the dollar, with the impact on the exchange rate exaggerated by very light trading due to the holiday.

“That illiquidity makes any bid go through the market like a stick of dynamite,” Harris said. “And we have, to a limited extent, somewhat worsening geopolitical concerns.”

Earlier this month, North Korea said it would restart its nuclear reactor programme frozen under a 1994 deal with the United States in order to produce electricity.

The development has lead to fears the programme will be used to make nuclear weapons, and comes on top of the existing worries about economic fallout from a possible US attack on Iraq.

Most economists say the rally is more a story of the dollar’s weakness than of any new confidence in the economies of the 12 countries that use the euro. Growth in the euro countries has been sluggish, with only a 0.3% increase in gross domestic product during the third quarter.

Investors have pulled out of dollar assets as US stock markets have performed weakly during the year, and as fears have grown about the strength of markets’ recent rebound. Some of that money has fled to short-term cash holdings in Europe, where interest rates are higher.

Moving from dollar-denominated stocks and bonds to assets in other currencies means selling dollars – and thus driving down the dollar’s exchange rate.