The dollar hit a three-month low against the euro in early trade on Friday, as its recent weakness against major currencies continued.

The dollar's fall was triggered by the release of the US Federal Reserve's "Beige Book" report on Wednesday which gave a worse than expected picture for the US economy.

In early European trade on Friday, the dollar fell to 89.55 cents against the euro, but then fought back slightly. By 1700 GMT, it had strengthened to 89.37 cents.

The dollar also strengthened slightly against the yen, rising to 122.07 yen at 1700 GMT. On Thursday it had fallen to 121.35.

US worries

The dollar's slide was prompted by the Fed's pessimistic Beige Book report earlier in the week.

The report saw economic growth stagnating, and seems to have led analysts to reassess the value of the dollar.

"Due to fears over the US economy, people are now rushing to minimize their exposure to dollar-denominated assets and this practice is likely to continue to weigh on the dollar," said Shinsei Bank foreign exchange manager Masanori Hirabayashi.

Many people have argued the dollar is overvalued, and on Thursday General Motors' chief financial officer John Devine urged the Fed to weaken the currency as its strength could hurt US manufacturers.

The question some analysts are asking is whether the dollar's move is part of a continuing trend.

David Bloom, currency strategist at HSBC, says that, given the dollar's trade-weighted value has risen 30-35% since 1995, the moves of the past few days are a drop in the ocean.

"If the dollar's got to come off its highs it's got to come down a lot more than 2-3% - a proper move would be 5-10%," he said.

Euro hopes

As well as disappointment over the performance of the US economy, the euro has been helped against the dollar by hints that the European Central Bank (ECB) might be considering cutting interest rates.

The latest monthly report from the ECB released on Thursday said "sizeable" risks remained to growth in the eurozone.

The ECB also said inflationary pressures in the eurozone may be easing.

This could give the bank scope for a rate cut which many people argue is needed to encourage growth in the 12-state zone.