The US dollar has tumbled to its lowest level against the euro in more than three years.

Defiant comments from Iraqi President Saddam Hussein increased fears the US would take military action in the Gulf region.

The euro climbed to $1.0665 from $1.0614 late on Thursday in New York, having earlier hit a peak of $1.0679 - the currency's highest level since October 1999.

It is a better reflection of the fundamentals of the European economy. It is welcome EC spokesman

"This is a case of the dollar coming under pressure across the board... The market is now positioning itself for a [weapons] find that could trigger a real conflict," said Ian Ballard, senior currency strategist at BNP Paribas.

Europe cheers

The euro's rise against the American currency was welcomed by the European Commission on Friday.

"It is a better reflection of the fundamentals of the European economy. It is welcome," said a Commission spokesman on economic and monetary affairs.

As the dollar slid to new lows, the price of gold, a traditional safe haven during periods of international tension, reached a new six-year high.

Prices weakened slightly in late London trade as investors decided to take profits.

At 1700GMT, it was trading down $1.50 down at $356.10 per ounce.

But traders expect prices to remain buoyant.

Commenting earlier, Peter Tse, dealer at Scotia Mocatta in Hong Kong, said: "I think that we are going to stay above US$355 and possibly test higher with more weakness in the US dollar.

"Anything can move it a few dollars in this market."

Oil prices dipped slightly on Friday morning following a report in the German weekly Der Spiegel that Iraq was considering a plan for its leader Saddam Hussein to go into exile.

Price rises

But prices began climbing again after US Secretary of State Colin Powell forecast that within two weeks it will have been proved that Iraq is not cooperating with UN weapons inspectors.

Crude oil futures in New York rose 34 cents to $34.00, just above two-year highs reached on Thursday.

Brent crude in London was steady at $30.58.

Prices have jumped nearly three dollars, or 9%, this week as a 47-day oil workers strike in big exporter Venezuela runs down US crude inventories, leaving world markets more vulnerable to a halt to Iraqi supply.