At the beginning of the year the prevailing consensus view was that the US dollar would continue to weaken on the foreign exchange markets, due primarily to the persistence of the US trade deficit.

This view echoed that prevailing at the start of 2004 and indeed the consensus view that the dollar would weaken proved to be correct in 2004.

However, dollar falls only occurred towards the end of the year and, in fact, from January to April 2004, the greenback climbed by 9 per cent versus the euro to the surprise of most market participants.

The pattern that has emerged in the currency markets so far in 2005 bears an uncanny resemblance to that which occurred over the same period in 2004. The current euro/dollar exchange rate of $1.255 compares with the end-December 2004 rate of $1.359, which equates to a euro depreciation of just under 8 per cent.

Investor is not surprised at this dollar rally in view of the steady rise in US short-term interest rates, where the Fed funds rate has risen from 1 per cent a year ago to 3 per cent now, with the futures market factoring in a rate of 4 per cent by year-end.

The European Central Bank (ECB) has held its repo rate at 2 per cent for 23 months and those expecting a rise in 2005 are now in a minority.

Therefore, interest rate differentials are increasingly acting to support the dollar exchange rate.

Although this dollar-friendly trend in interest rates can explain the recent recovery in the dollar exchange rate, many analysts are still clinging to the view that the negative impact on the exchange rate of the large US trade deficit will eventually reassert itself.

As a result, many market participants expect a repeat of last year's experience with the dollar weakening over the second half of 2005.

Recent developments in Europe have called into question this cosy consensus. The eurozone economy continues to stutter and an interest rate rise from the ECB in 2005 is now almost inconceivable.

Every new piece of economic data provides further confirmation of a slowing European economy. Germany and Italy are flirting with recession and the pace of growth in France continues to disappoint.

On Tuesday, the German ZEW economic sentiment index dipped to 13.9 in May from 20.1 in April.

This coincided with the OECD cutting its 2005 German growth forecast to 1 per cent from 1.2 per cent, and that for 2006 to 1.6 per cent from 2.1 per cent.

This ongoing bad news regarding economic growth in the core European economies has led to some calls for lower euro interest rates.

On the political front, the looming referendums on the European constitution in France and the Netherlands are beginning to unsettle the markets as the odds shorten on a "No" vote in both countries.

The political fallout from such an outcome is impossible to predict, but past experience suggests that the politicians will eventually find a way to resume forward momentum.

Despite the proven robust nature of European political institutions, Investor senses that a "No" vote could have a very unsettling effect on the euro. This is because it may result in the spotlight being turned onto the euro zone's structural economic weaknesses.

Sentiment in the foreign exchange markets can be notoriously fickle and a "No" vote could be just the catalyst to end the medium-term bull trend in the euro.

Ironically, a weaker euro could be just the tonic that the European economy needs. Exports are a significant source of demand in the slow-growing core euro-zone economies and a weaker euro would restore some of the lost competitiveness of recent years.

It may create some inflationary pressures, particularly if oil prices stay high, which could provide the ECB with an excuse to raise interest rates.

However, such pressures would only become manifest after a substantial time lag and would only be a problem if there were a large depreciation in the euro.

Investor takes the view that the odds are now high that the euro will fall in value but expects this fall to be modest and gradual.

A weaker euro would be mildly positive for the Irish stock market and would particularly benefit those companies with exposure to the US dollar.

Of the larger stocks CRH, AIB and Kerry Group are all beneficiaries of a stronger dollar.

For the troubled Waterford Wedgwood group a weaker dollar could be just the lifeline that it needs.

Turning points in currency market trends are extremely difficult to identify but the trends that emerge on the foreign exchange markets in coming weeks may confirm whether or not the euro bull market has come to an end.

A weaker euro would be mildly positive for the Irish stock market and would particularly benefit those companies with exposure to the US dollar. For the troubled Waterford Wedgwood group, a weaker dollar could be just the lifeline it needs.