The euro rose to a fresh record high against the dollar today, reaching $1.3920 in early European trade. Late this afternoon it was trading at $1.3882.
The European single currency breached the $1.39 level for the first time on market expectations yesterday that the US Federal Reserve will next week begin trimming interest rates.
Investors are increasingly worried the US economy may be heading towards a recession owing to a downturn in the property market.
Speculation is rife about whether the Fed will reduce its benchmark interest rate by a 0.25% or 0.5% on Tuesday, and whether further cuts will follow.
'Much of the weakness in the dollar can be attributed to intensifying concerns about the US economy but if the Fed does cut as we expect it may be able to help avoid deeper damage to the economy as lower rates provide a stimulus,' Calyon economist Mitul Kotecha said.
'Although a 50 basis points move by the Fed next week cannot be ruled out, it would smell of panic and instead the Fed is likely to pursue a more gradual pace of rate cuts over coming months, with the Fed Funds rate set to fall to 4.50% by year end,' Kotecha added.
While the Fed is on course to cut rates, by contrast, the European Central Bank seems poised to tighten its monetary policy and to hike its key rate by at least a quarter point to 4.25% before the end of the year.
The most obvious losers from a euro trading near $1.40 will be major eurozone exporters to the United States as they will obviously find their competitiveness impaired.
They will also be at a disadvantage against US exporters in third country markets, while eurozone companies will also be less competitive in their domestic markets against imports from the US and dollar-linked countries.
