Dollar slides towards parity with the euro

The ailing dollar was sliding rapidly towards parity against the euro yesterday, as fears over the health of the US economy, profits warnings from blue-chip companies and the whiff of scandal surrounding corporate America continued to put the greenback under intense pressure on the foreign exchanges.

The slide prompted a call by the IMF for the US to tighten its budgets to prevent a further fall, which could threaten the global economic recovery.

Turbulence in the currency markets spilled over into share prices, where a new wave of selling saw stock markets falling across the world, sending investors scurrying for the havens of gold and the Swiss franc.

Resuming its decline of the past two months, the dollar dropped below $0.98 against the euro to a 27-month low in early trading. Speculation that the US Federal Reserve will leave interest rates on hold tomorrow to safeguard economic recovery undermined confidence in the dollar.

Intervention in the currency markets by the Bank of Japan prevented the dollar from falling against the yen, and it rallied modestly against the euro in early trading in New York to $0.9775. Traders said, however, that it was only a matter of time before the dollar was trading at one-for-one against Europe's single currency. "It's just one-way traffic," said a dealer at a US bank. "Breaking $0.96 last week was a massive level. There's no end in sight for now."

Sterling rose to a 17-month high against a broadly weaker dollar, but fell to its lowest level for two and a half years against the euro. The pound was trading at $1.5084, its highest since January last year, and 65.12p per euro, with traders eyeing the 65.20 level, equivalent to the old sterling/deutschmark rate of three marks to the pound.

Some traders said a further small decline in sterling would bring it down to levels that would be consistent with entry into monetary union, although a new poll by a City firm yesterday showed public opinion hardening against entry.

The Barclays Capital survey found that recent euro-friendly statements by the prime minister and other ministers were having no impact on public opinion, with 49% of those interviewed saying that they would reject joining the euro even if the government recommended entry, up 3% from the May figure.

Barclays said it was the highest level of euro opposition measured since the Eurotrack survey began asking the question in January, and suggested that a poll at the time of the launch of euro notes and coins in January showing a small majority in favour of entry had been an aberration.