A rapid rise in the value of the euro against the dollar could have damaging consequences for Europe's economy, the German banking federation has warned.

Moving markets

Oil price: $30.50 barrel - 2 year high Gold price: $360 an ounce - 6 year high 1 euro = $1.07 - all time high

The euro was trading at above $1.07 on Wednesday morning, its highest level for more than three years.

The dollar weakened after President Bush's comments that time was running out for Iraq, suggesting that a war was imminent.

The single currency has risen almost 25% against the dollar from its low of 86 cents just over a year ago.

A strong euro dents the competitiveness of companies exporting from the eurozone, making their products comparatively more expensive.

Interest rate cuts

Eurozone economies - and Germany in particular - are struggling to recover from last year's weak growth.

"It's important that a possible further strengthening of the euro should occur at a moderate pace," the banking federation warned.

"Rapid and sharp exchange rate movements could unnerve economic players even more," it cautioned, adding that the current level of the euro was not high enough to lower growth forecasts.

There has been growing speculation the European Central Bank (ECB) could counter the economic impact of the euro's strength by cutting interest rates.

"The move [in the euro] has undone a lot of the benefit from making a 50 point cut [in December] , so I think the ECB should be thinking seriously about cutting interest rates some more," said Michael Dicks, chief European economist at Lehman Brothers.

Gold gains, stocks fall

But expectations of a rate cut were being overshadowed by war fears on the European stock markets.

Leading indexes in both France and Germany fell by more than 1% in morning trade on Wednesday.

And investors rushed to gold, the traditional safe haven in troubled times.

The price of gold jumped to $360.25 an ounce, its highest level since March 1997.