THE euro climbed above $1.30 on Friday, hitting its highest level since April 2005, with further gains predicted in the months ahead. The dollar fell sharply at the end of last week on fears about the US economy, unsettling financial markets.

The dollar’s fall had a knock-on effect on a wide range of markets. The price of crude oil rose in dollar terms as a direct reflection of the American currency’s weakness.

“The dollar is the big story,” said Nick Stamenkovic, an economist with RIA Capital. “The question is whether it has been exaggerated by thin markets.”

US trading was quiet ahead of the weekend as a result of the Thanksgiving Day holiday.

“The break of 1.30 is a strong signal that the dollar has to weaken,” said Carsten Fritsch, a currency strategist at Commerzbank in Frankfurt.

“The sentiment for the dollar is negative. In the euro-zone, growth will remain strong.”

Analysts believe that the Federal Reserve will cut interest rates next year in response to economic weakness, undermining the dollar.

“The dollar has been hurt recently by some softer US economic activity and inflation data, which have raised expectations that the Federal Reserve could start to trim interest rates in the first half of 2007,” said Howard Archer, an economist with Global Insight.

Global Insight predicts that the euro will rise to $1.40 during 2007, implying that sterling will break through $2 and stay there. This will help ease inflationary pressures in Britain and Ireland, but make life difficult for exporters. A weak dollar will also hit Irish companies with high exposure to the currency, including Waterford Wedgwood.

The pound could be set to break the $2 barrier this week, analysts say, if last week’s dollar selling wave continues.

Sterling has strengthened against the beleaguered dollar in spite of the fact that expectations of further UK interest rate hikes have faded. It closed at $1.93 on Friday, its highest for 18 months, even though US interest rates are higher than in Britain.