The euro has ended its first year as a cash currency at its highest level for more than three years, as fears of a US war against Iraq undermine the dollar.

One year after Europeans handled their first notes and coins, the euro climbed from $0.8899 on 1 January to reach $1.050 at 1159 GMT.

The euro, which represents the European economy, is ...a new, big protagonist in the world economy Romano Prodi President European Commission

"It's more of a political story than an economic one," said Audrey Childe-Freeman of the Canadian Imperial Bank of Commerce.

"Iraq and North Korea are weighing down the dollar," she said.

The British pound has leapt to a two-and-a-half year peak against the dollar but has fallen to its lowest level against the euro for more than three years.

But newspaper reports that British Prime Minister Tony Blair had ruled out a referendum on joining the euro during the current term of government pushed sterling back up slightly.

By 1200 GMT sterling was trading at $1.6118, its highest since February 2000, and had recovered slightly against the euro, after it fell as low as 65.1 pence, its lowest since September 1999.

Official delight

European Commission President Romano Prodi said in a New Year's eve interview that the euro's cash introduction had been a success.

	:	Slippery slopes
Markets across the world had a difficult year.

He said it could not be blamed for price rises.

"The balance sheet is positive in every aspect," he told Italian daily newspaper La Republica.

"The euro, which represents the European economy, is therefore a new, big protagonist in the world economy," he said.

Europeans have complained of price rises since the changeover to euro notes and coins, but the EU has blamed lack of government controls.

"The price increases have been altogether modest ...but they should have been avoided because they were completely unjustified," Mr Prodi said.

"The euro has not been the cause, but the occasion for illegitimate and surprising behaviour that was not controlled," he said.