The euro plunged to a nine-month low against the dollar this evening as investors fretted about the political future of the European Union ahead of a potentially contentious EU summit later this week.
The single European currency in late-day trade was at $1.2048 from $1.2122 late on Friday in New York. The euro at one point fell to as low as $1.2028, its weakest level since September 8, 2004.
The US currency has also been buoyed by better-than-expected news on prospects for the US budget and current account deficits and expectations that interest rate differentials between the US and the 12-nation euro zone will widen further in the coming months.
Analysts said that a 'free fall' is possible should this week's EU summit descend into acrimony if the future of the British rebate is not resolved.
France is arguing that Britain is undermining European solidarity by refusing to give ground on its annual EU refund, while the British say they will only discuss the rebate if large farm subsidies - that benefit French farmers in particular - are relaxed.
The rebate row comes in the wake of the French and Dutch rejections of the EU constitution in referenda May 29 and June 1.
Such political concerns have coincided with mounting expectations that the US Federal Reserve will continue raising the cost of borrowing in a measured manner over the coming months.
At the same time, the European Central Bank is being urged to cut rates to help boost euro zone economic growth. The US Federal Reserve has lifted its base rate by a quarter point in each of the past eight meetings to 3% to ward off inflation fuelled by a surge in oil prices. The European Central Bank by contrast has held its key refi rates steady at 2% since June 2003.
This week's US economic news - notably regional manufacturing surveys - is likely to support expectations of a widening in rate differentials, especially as the talk in Europe is turning towards a cut in borrowing costs.
