The dollar surged to hit one-month highs against the euro yesterday, buoyed by a rally on Wall Street and persistent rumours that the Federal Reserve was on the point of cutting interest rates, writes Una McCaffrey.

The gains in the US currency saw the euro fall to 96.2 US cents in the course of the day, down from 98 US cents in early trading. A similar hit was felt by sterling, the yen and the Swiss franc.

Ulster Bank financial markets analyst Mr Niall Dunne said that the dollar had been led upward by stock markets, which had in turn been reacting to the now widespread speculation on an interest-rate cut in August.

Mr Dunne said that the rumours appeared to come to light on each occasion where the Dow sustained heavy losses. US markets lost more than 3 per cent of their value on Monday.

Analysts also believe that the market is being driven by currency speculators who piled into short positions in the dollar when it reached parity last month but had been pushed out as soon as it began to strengthen again.

Mr Dunne suggested that the dollar could also be benefiting from a sell-off in foreign equities by Japanese mutual funds, which had forced them to buy the US currency.

Commentators have attributed the latest upswing in part to a lack of self-belief in economies outside the US, as fears grow that the current slowdown could turn into a double-dip recession and extend around the world.

"The euro zone is not strong enough to sustain a US downturn," said Mr Dunne yesterday, pointing out that any growth currently seen within the euro zone is heavily supported by exports to the US.

In line with the double-dip theory, Mr Dunne expects the dollar's current strength to be short-lived, predicting a return to parity with the euro over the coming month. He admits however that the growing likelihood of war in Iraq could upset this scenario.

In European trading, the dollar closed at 0.9646 cents.