The euro has continued trading around $1.03 as remarks made by the European Commission president, Mr Romano Prodi, weighed on the currency for the second day in a row.

The euro closed at $1.0309 from $1.3101 a day earlier and at 64.95p against sterling from 64.99p. As a result, the pound closed at 82.42p sterling from 82.52p on Monday.

According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, the lack of intervention on behalf of the Bank of Japan also weighed on the currency. "But really it was still being undermined by Mr Prodi's comments yesterday, which allegedly related to the potential exit of Italy from the euro."

He added that continuing weak sentiment and lack of support means the currency is still on track to test parity against the dollar.

According to Mr Prodi, remarks he made to the Italian chemical industry about Italy potentially having to leave the euro were quoted out of context. And a European Commission spokesman said yesterday that Italy's inflation in itself was not a major worry and that the EU treaty was clear on the irrevocable nature of the union.

Even comments from the German finance ministry that the German economy is showing signs of renewed strength failed to lift sentiment.

It said there is now a good chance that the German economy will meet the growth target of 1.5 per cent this year. In its latest monthly report, the ministry said: "Overall economic output has increased substantially in the first quarter."

The French reported that industrial production fell 0.6 per cent in April after a revised 1.2 per cent rise in March, but dealers saw the market remaining volatile until uncertainty over the direction of US interest rates was removed after the Federal Reserve's next meeting on June 29th and 30th.

In addition to the French April industrial output figures, new data from Italy showed the jobless rate fell to 12.1 per cent for April, lower than expected. Germany's industrial output index for April was revised down to 104.4. But the finance ministry sees growing signs of recovery.

Further intervention to prop up the yen failed to emerge and, as a result, the dollar gave up some of its recent gains against the Japanese currency. Traders said there was little doubt that the Bank of Japan would intervene again if the dollar kept sliding.

Every time they said they would, they have, said a dealer at a European bank in London.