The euro rose to 10-week highs against the dollar as pessimism on US growth prospects resurfaced. A weaker than expected US national association of purchasing managers index kept the euro above $0.88 against the dollar.

"The market has already priced in the fact that the European economy is slowing down. The real news is the renewed weakness of the US figures," said Mr Michael Metcalfe, currency strategist at Credit Agricole Indosuez.

European purchasing managers data also showed a big drop in price pressures, raising hopes that the European Central Bank may move soon to tackle the slide. Activity in European manufacturing also weakened markedly.

A move is thought unlikely at today's meeting. The ECB is reluctant to cut rates from its current level because harmonised inflation, at 3 per cent year-on-year in June, is well over its 2 per cent ceiling. The purchasing managers' figures showed US factories continue in recession as the July NAPM fell to 43.6 from the previous month's 44.7.

However, data out of the euro zone were scarcely more positive with the euro-zone purchasing managers' index figure dropping to 47.3 in July from 47.9 in June, just above the lowest reading in the 50-month history of the survey of 47.2 in December 1998.

The jobless rate in the euro zone held steady at 8.3 per cent for the third month in a row in June despite a rise in unemployment in France and Germany.

Growing evidence of a US slowdown in recent weeks has led some banks to change their views on where the euro is heading against the US currency and many analysts now see the euro beginning to recover.

Citiflows Advisors, a Citibank unit that analyses currency flows, yesterday said it recommended investors buy the euro against the dollar, predicting the currency would strengthen to $0.90 in the next month. It was the first time the Citiflows unit recommended buying euros since February 2000. CIC Capital Markets also believes the euro will have risen to $0.90 or even $0.95 by September.

But others are less optimistic. "We are still in the middle of a technical rebound started a couple of weeks ago," said Bank of America economist Mr Loren zon Codogno, adding that the revival had been sparked by downbeat comments on the US economy by Federal Reserve chairman Mr Alan Greenspan. He added that the "euro is going to run out of steam pretty soon".

In a Reuters survey carried out this week, the median of 52 forecasts showed the euro at $0.88 in one month, $0.89 in three months and $0.90 in six months. On a 12-month view, analysts forecast the euro will be at $0.9320.