The European single currency fell to its lowest-ever level at the end of last week, when it dropped below $1.04 in New York trading.

That meant in total it has dropped by 11.5% in value since the start of the year.

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But with talk of the European Central Bank stepping in, the euro recovered marginally on Monday to stand at $1.044, compared to $1.041 on Friday afternoon.

The speculation about central bank intervention was sparked by reports that Bundesbank president-designate Erst Welteke had said that the euro's recent weakness meant that it now needed "close monitoring"

But one currency trader commented: "The market smells blood. The euro is heading for dollar parity, it's only a matter of time."

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Correspondents say the ECB may have to act before Thursday's summit of the European Union in Cologne.

"Everyone is pretty cautious at the moment as the speculation is boiling whether the ECB will intervene or not," said Klaus Kusber, currency strategist at Dresdner Kleinwort Benson in Frankfurt.

Meltdown

There was no sign of intervention on Monday with analysts speculating that action may only be taken if the euro falls below parity with the dollar.

Economists Trevor Williams (Lloyds TSB) and Kate Barker (CBI) discuss the implications of the Euro's slide

The whole situation is a far cry from the launch five months ago when the currency was hailed as a challenger to the international supremacy of the dollar.

Then the euro was worth $1.17.

Dealers and analysts believe that the euro's recovery will be linked to a drop in the US dollar or signs of growth improving among the 11 euroland countries.

But there are a clutch of worries which will have to be overcome:

• Stability Pact rules have been relaxed for Italy as its budget deficit will exceed the 2% euro membership parameter
• A new book, 'The Bank', says ECB president Wim Duisenberg wanted a two year delay in the currency's launch
• France is heading for a sharp economic slowdown and the Bank of England Governor Eddie George says joining would be a "leap of faith" for the UK
• Support for the euro in the UK, recently surveyed by DHL, is undermined by the flow of depressing news. British exporters in favour of joining the euro are down from 71% to 66%, says the DHL report

Bending the rule book

The Stability and Growth Pact was supposed to ensure that all 11 governments in the eurozone met tight fiscal targets. It is seen by many bankers as vital if the eurozone interest rate is to be held at its current level of 2.5%.

Chief Economist of Deutsche Bank, Stephen Bell: Intervention of the ECB would be "a mistake"

But market confidence in the euro is being knocked by increasing evidence of a lack of economic convergence among member countries, in other words that their economies are not synchronised with some performing much better than others.

This means they require different economic policies and not the "one fits all" straight jacket imposed by the ECB.

While economic growth in France and Germany is spluttering, Ireland, Spain and Finland are roaring away with a real likelihood that the Irish economy will overheat.

With house prices in Dublin rising by 40% the last thing it needs are low interest rates.

Rallying cry

Nevertheless, there are plenty of economists who reckon the euro will rally.

They see it as a problem of a strong dollar, but should the US economy falter then there will be a change in fortune for the euro.