The president of the European Central Bank (ECB) has moved to try to stop the euro's rise, saying that the recent fall in the US dollar was " brutal" and unwelcome.
The comments by Mr Jean-Claude Trichet triggered a limited dollar recovery yesterday, but market analysts believe that sentiment towards the currency remains negative.
Earlier the euro hit a new high of just under $1.30, as the US currency continued to be weighed down by fears about the US current account and federal budget deficits.
The currency has been weak since shortly after the presidential election result was announced last week, as investors appear to re-focus on the fundamentals problems facing the Bush administration.
A stronger euro hits euro-zone exporters and yesterday Mr Trichet spoke out at a bankers' conference in Basel.
"The recent moves, which tend to be brutal on the exchange markets between the euro and the US dollar, are not welcome from the standpoint of the ECB," Mr Trichet said after a G10 meeting on the global economy.
When asked whether the G10 governors saw dollar weakness as a threat to economic growth, he replied: "At the level of the global economic meeting, we didn't have such an exchange of views."
With no other central bankers speaking out at the moment about currency movements, Mr Trichet's comments were not seen as offering significant support to the dollar.
Given the sharp fall in the dollar in recent days, it was not surprising that Mr Trichet's comments sparked some profit taking, commented Mr Niall Dunne, economist at Ulster Bank Markets.
Once the dollar rose slightly yesterday selling pressure re-re-emerged he said, forecasting that the euro would breach the $1.30 barrier this week for the first time since the single currency's launch in 1999.
In early trading yesterday the euro rose as high as $1.2985. The US currency rallied slightly later, but in late trading the euro was still comfortably over $1.29, with most analysts predicting that the US currency will remain weak.
The focus now moves to US trade figures for September, due on Wednesday, which will again highlight the huge deficit of exports over imports. The trade deficit is the main contributor to the huge deficit on the current account of the US balance of payments.
This deficit requires huge investment inflows into the US and the markets fear that the currency may come under pressure if these investment flows slacken.
The Bush administration, meanwhile, is seen as having little appetite for tackling the soaring federal budget deficit.
Later tomorrow the US Federal Reserve Board is expected to announce a 0.25 of a percentage point increase in interest rates.
This would bring its key funds rate to 2 per cent and would be the fourth increase since June. The key focus on the markets will be the statement accompanying the expected rate increase.
Any indication that the Fed could now wait some time before announcing a further rise could spark further dollar weakness. - (additional reporting Reuters)
