Investors are ignoring an economic pick up and gains in share prices

The dollar slid as low as $1.2450 in New York on Monday, before rebounding slightly.

It also fell against the Japanese yen and in Europe.

Many investors were spooked by the US raising its security alert over the weekend, warning that any attack may exceed those of September 11, 2001.

Alert levels

The US is now on a "high" or "orange" alert, its second-highest level, and Homeland Security Secretary Tom Ridge said that Osama bin Laden's al-Qaeda network might be planning to use aircraft again in new attacks.

We now believe there is a 30% risk that the dollar could drop to $1.50 to the euro Economist Intelligence Unit The ups and downs of the euro against the dollar and 23 other currencies

Mr Ridge urged people to "be vigilant and be aware, and let the security professionals ... worry about your security".

His words, however, seem to have done little to reassure investors.

The dollar has now lost as much as 15% against the euro this year and many observers expect it to continue weakening despite improving economic conditions.

Forecasts cut

Research company the Economist Intelligence Unit said on Monday that it has cut to $1.271 its 2004 forecast for the average exchange rate of the US dollar against the euro.

"We now believe there is a 30% risk that the dollar could drop to $1.50" per euro next year, the EIU said.

And that is as they raised their target for annual economic growth to 4.2% from 4%.

While there is no doubt that an economic recovery is picking up pace, the driver of that growth may be contributing to some of the dollar's problems.

At present, the country has the lowest interest rates in almost 50 years.

Deficits

While that may be good news for people borrowing money, it does little to attract investors who can find better returns on their cash elsewhere.

The Federal Reserve, the US central bank, has set its benchmark interest rate at 1%, half that of its European counterpart.

Investors also said they are concerned about the country's widening deficits.

The growing Federal budget deficit, as well as the growing trade gap, are increasingly seen as unsustainable by foreign investors, who are therefore increasingly reluctant to invest in the US and finance the shortfall.

Even President George W Bush's assertion that his administration favours a strong dollar has done little to improve matters.