Currency rates are good news for Europeans shopping in the US

With investors fearful the US housing slump will hit the wider economy, the euro rose as high as $1.3784 before pulling back slightly to $1.3742.

The dollar's latest fall came after the Standard & Poor's credit rating agency said it may downgrade $12.1bn of bonds backed by US sub-prime home loans.

Meanwhile, the pound hit $2.032 as it extended its gains against the dollar.

The pound is at a 26-year high against the US currency amid contrasting prospects for interest rates in the two countries.

The result has been to put the dollar under some sustained pressure

David Jones, CMC Markets

Q&A: Strong pound

US housing worries led to falls in Asian and European stock markets in early trading, echoing weakness on Wall Street on Tuesday.

By mid-morning, the euro had eased slightly to $1.3740 against the dollar.

"Currency markets have arguably been left focusing on just one point at the moment and that's concern over the possible collapse of the US sub-prime lending market," said David Jones, chief market analyst at CMC Markets.

"The result has been to put the dollar under some sustained pressure."

Repossessions

Sub-prime mortgages are higher-risk loans given to borrowers with a poor credit rating or those on low incomes.

US house repossessions in the sector have reached record highs this year.

Both the euro and the sterling have benefited from recent interest rates rises by the European Central Bank (ECB) and the Bank of England.

While the ECB has kept eurozone rates on hold at 4% this month, they have doubled in 18 months, and more rises are expected by the end of the year.

The Bank of England last week increased rates to 5.75%, and most analysts expect a further rise before the end of the year, as both it and the ECB move to slow inflation.

In contrast, US rates were kept on hold at 5.25% following the Federal Reserve's most recent rate-setting meeting last month. It was the eighth time in succession that the Fed had left rates unchanged.