Disappointing US jobless data for December brought renewed pressure on the dollar yesterday, pushing it to its second three-year low against the euro in two days.

The European currency tested $1.0573 as traders instantly sold dollars in the wake of the payroll numbers, which showed that the US economy lost 101,000 jobs outside the farm sector last month.

Analysts had been expecting employment numbers to grow and provide an antidote to ongoing uncertainties over US policy on Iraq and North Korea. The marked reduction, which was particularly striking in the retail sector, simply supported a continuing flight out of US assets.

Sterling was hit by the weakness of the US numbers too, also sinking to a three-year low against the euro. The European currency reached 65.66p at its peak, before falling off to close at 65.34p, up just marginally on the day.

The euro closed at $1.0503 against the dollar, down from Thursday's $1.0507 close.

Both movements, if sustained, are likely to create competitiveness difficulties for Irish exporters, whose two largest markets are the US and Britain.

Dr Dan McLaughlin, chief economist with Bank of Ireland, said the euro's strength against the dollar over recent months had been supported by inflows of bond investment to the euro zone, as buyers sought to take advantage of higher European interest rates.

Speculative selling of the dollar has also been a significant factor, Dr McLaughlin believes.

Going forward, he sees the euro's momentum lifting it to further gains against the dollar but warns that this scenario is open to a number of risks. Renewed strength in the global economy or a significant sale of euro assets by speculative buyers could drive the euro down below parity, according to Dr McLaughlin.

"The euro is vulnerable to a short-term setback if offloaded," he said.

Mr Oliver Mangan, chief bond economist with AIB, said the uncertainty surrounding the US economy and equity markets, and the threat of war, would continue to plague the dollar in the short term.

He expects the euro to trade in the top half of a range between $1.02 and $1.07, allowing for a rise to $1.10 in coming months, particularly in the event of an Iraqi war.

He also said that many analysts saw the 11 per cent fall in the trade-weighted value of the dollar during the past year as the start of a longer-term correction.

"It would be foolish to dismiss the risks of a further steep fall in the value of the dollar in 2003," Mr Mangan said in a briefing note.

Gains against sterling are likely to be more limited, according to Dr McLaughlin, who predicted that the euro would trade no higher than 67p until issues surrounding Britain's entry into European monetary union are resolved.

Mr Brian Ranalow, president of the Irish Exporters' Association, said that when the currency movements of the past year were combined with the Republic's relatively high inflation rate, Irish exporters were left at a serious disadvantage in key markets. "It is a problem," he said, warning of severe difficulties in the event of a continued upward movement in the euro.

While most exporters employ hedging strategies, prolonged weakness in the dollar and sterling cannot be entirely cancelled out, according to Mr Ranalow.

A recent association study showed that Irish exporters lost market share in five of their top 10 markets last year.