Euro powers to parity with dollar

Analysts expect euro to hit $1.05 by end of year and $1.10 in 12 months time

LONDON, England (CNN) -- The euro has hit parity against the U.S. dollar for the first time since February 2000 as demand for U.S. assets falters.

The euro bought 1.0041 dollars in Monday mid-afternoon trading in London. Its rise is broadly good news for U.S. exporters and for European travellers who will be able to buy more dollars for their money.

And it could help the European Central Bank (ECB) and the single currency, used by the 12-nation euro zone, regain credibility.

The dollar has come under pressure in recent months as doubts over the strength of the U.S. recovery and the reliability of accounting standards have damaged confidence in corporate America.

Europe's single currency began trading on January 4, 1999, above $1.17, but declined steadily to hit a record low of $0.8225 in October 2000, down 30 percent from its starting level.

Since then it has risen despite a lack of confidence in the ECB and prospects for growth.

But global investors, which had ploughed $116 billion into U.S. stocks last year, are now withdrawing money rapidly -- unconvinced by the strength of the U.S. economic recovery.

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"Will the market push on for $1.05 this year and $1.10 by this time next year? We definitely believe that it will be the latter," Steve Barrow, currency economist at Bear Stearns, wrote in a note to investors before the euro hit parity.

"The euro has seen many false dawns before. But most of them have stalled out around the mid-90s. This time the euro rallied much further and, more importantly, its rise has been accompanied by a global dollar slide." (More analysis)

European businesses are only likely to complain if the euro goes above $1.05, according to a Reuters survey of economists. An increase in the euro can make exports much dearer and reduce the amount of money a business can make once goods are sold and the receipts are converted back into euros.

The currency is currently under used by central banks across the globe, which have chosen to hold the dollar as reserve funds.

Many Asian banks have increased the value of their euro holdings -- although many are tight-lipped about their holdings. South Korea said the euro replaced the yen as the second-largest currency in its $110 billion reserves early this year.

The Federal Reserve has said U.S. reserves it holds for overseas central banks have fallen to $592.031 billion as of January 2002 from $632.482 billion in 1999.

A basket of currencies -- including the Swiss franc, sterling and yen -- have strengthened against the dollar over recent months for different reasons.

The dollar fell more than half a percent against the yen to its lowest level since late September on Monday. Japanese authorities have sold the yen on at least seven days since late May to curb its strength.

Any move by central banks to increase their holdings of the euro are likely to add more pressure on the dollar and boost the euro, which could eventually make European companies less competitive.

"The euro remains competitive, well below levels witnessed at the start of European monetary union when there was little complaint from manufacturers," Ken Wattret, economist at BNP Paribas, told Reuters