The dollar strengthened against the euro yesterday after the White House proposed sweeping cuts in the US budget, bolstering the view of some in the market that the country's deficits are under control at present.

Against the rising dollar, the euro clawed back some ground to $1.2835 by morning in New York after falling to a fresh three-month low of $1.2828. It later fell even further, however, touching a three-and-a-half month low of €1.2745, 7 per cent off the dollar's lows of early January.

"This [ budget] does lay the groundwork for more fiscal responsibility out of the White House but this still has to be approved by Congress," said Mr Omer Esiner, market analyst with the Ruesch International consulting firm in Washington.

"Seeing how this plays out on Capitol Hill will affect the dollar."

The dollar has been looking more solid since Friday, when Federal Reserve chairman Mr Alan Greenspan made sanguine comments about the US trade deficit in London.

Mr Greenspan said "the voice of fiscal restraint", along with market forces, was helping in the long-run to narrow the US current account gap, which is running at close to 6 per cent of gross domestic product.

Mr John Moclair, head of domestic sales at Bank of Ireland Global Markets, said Mr Greenspan's Friday speech was still resonating in the market yesterday.

"Market players are beginning to give these comments more importance, as representing a shift from the concern he expressed about the deficit late last year," said Mr Moclair.

"At that time, the comments, led to a fall in the dollar. His comment on Friday is having the opposite impact now."

Mr Moclair pointed out that the €1.2745 level was important because it meant the euro had passed through an important support level, versus the dollar, of between €1.2825 and €1.2850.

"Now the market is talking about a move to between €1.2400 and €1.2500," he said.

President Bush handed a budget off to Congress yesterday that forecast a narrowing in the budget deficit to 1.7 per cent of GDP by fiscal year 2008. (additional reporting by Reuters)