The dollar charged higher yesterday, extending its biggest 24-hour rally against the euro since 1999, as currency markets scrambled to rethink competing economic prospects in the United States and the eurozone.

Dramatic gains by the dollar that took it to its highest for five months against a broad range of currencies sparked predictions from economists that it is embarked on a long-term recovery, after a five-year run of unrelenting weakness.

The rally in the dollar in yesterday’s frenetic trading triggered the steepest one-day losses for the euro for four years, sent US blue-chip shares soaring and fuelled sharp falls in oil prices of more than $4 a barrel.

On Wall Street, the Dow Jones industrial average leapt 302.90 points to close at 11,734.30.

Earlier, the newly vulnerable euro tumbled by more than 1.8 per cent to five-month lows just above $1.50 – leaving it almost 10 cents below its record high of $1.6028 struck less than a month ago. It lost nearly 5 cents during the past 24 hours alone.

The pound also tumbled against the resurgent greenback, plunging more than 2.8 cents to 17-month lows below $1.92, to close in London at $1.9159. Economists said that the dollar’s surge came after a barrage of bleak news over the eurozone’s economic outlook combined with more upbeat developments in the United States to lead global markets into a drastic reassessment.

While, until now, official eurozone interest rates that are more than double those in the US have kept the euro high by sucking in flows of “hot money” to Europe in search of stronger returns, analysts said that fast-fading eurozone prospects meant that this was no longer enough to bolster it.

“The dollar is, in my view, in a genuine recovery. This trend could run much further than many think,” Stephen Jen, of Morgan Stanley, said.

Markets’ fears over the threat of a severe eurozone downturn were fuelled this week when Jean-Claude Trichet, the President of the European Central Bank (ECB), admitted that the pace of decline in the economic fortunes of the 15-nation bloc had taken it by surprise.

Anxieties were reinforced yesterday after it emerged that the Italian economy shrank by 0.3 per cent in the second quarter, suggesting that Italy is in, or is very close to, recession. At the same time, a key ECB survey showed that eurozone banks further tightened lending conditions in the second quarter, adding to economic woes.

“This is a major reassessment. In a very short period of time, the sentiment turned 180 degrees,” Ulrich Leuchtmann, of Commerzbank, said. “The market now believes that the US economy once again will be able to leave a crisis behind very quickly . . . That’s why we see the dollar rising like a phoenix.”

Renewed market optimism that US growth will revive and inflation pressures ease was boosted by a further plunge in oil prices yesterday, adding to the dollar’s upward momentum. Benchmark US light crude fell almost $4.82 in early afternoon trading, at $115.20 a barrel, its lowest since early May and more than $30 below July’s record.

In turn, the dollar’s gains helped to stoke downward pressure on the price of oil, as well as the price of other commodities. Gold prices sank by $18.85 an ounce, or more than 2 per cent, to $853.60.

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