The euro could strengthen to $1.40 or beyond and the European Central Bank must be prepared to cut interest rates in response, former IMF chief economist Mr Kenneth Rogoff said today.
An exchange rate of $1.40 can be easily imagined; $1.50 or $1.60 are possible," he told Germany's WirtschaftsWochebusiness magazine.
ECB President Mr Jean-Claude Trichet has expressed concern about "brutal" movements on the currency market, where the dollar has tumbled about 12 percent against the euro since last September.
Mr Rogoff, now an economics professor at Harvard, said the ECB could not hope to stem dollar weakness by following the example of Asian central banks in buying US government debt. "The ECB must be ready to cut its interest rates," he said.
The ECB has shown little interest in cutting its key rate from 2 per cent, double the equivalent US rate.
Rogoff said the single currency's future strength would depend on whether the ECB and US Federal Reserve were prepared to make an "aggressive response".
However, he added that nobody really knew what the effects of a soaring euro and weak dollar might be. "If a variable as important as the dollar moves a large amount against the euro or the yen in such a short time, we simply don't know what sort of problems that will create for capital markets," he said.
The euro has repeatedly set new highs against the dollar in recent weeks but was slightly weaker today, trading at $1.2677.