The outlook for the euro is now potentially worse than ever, according to Ulster Bank economist Mr Aziz McMahon. His warning came as investors hammered the currency to below 90 US cents yesterday after the release of data showing that German business confidence slumped to a 19-month low in February.

The dollar gathered strength as investors ran to US bonds to take cover from further losses on global stock markets after a halfpoint rate cut by the US Federal Reserve did little to revive investor confidence.

"In this environment traders prefer remaining with the dollar by rotating dollar assets from equities to bonds rather than exiting the US currency completely," he said.

Mr McMahon said foreign exchange dealers were increasingly willing to look beyond temporary weakness, knowing the Federal Reserve is doing what is necessary to return the US to a relatively higher growth path.

By the same token, the markets take a dim view of the European Central Bank's "wait and see" approach. If the US economy begins to recover in the second quarter of 2001, one of the biggest risks to the dollar will be removed. Mr McMahon suggests the ECB could be faced with an even greater struggle to support the euro than it did last autumn.