The euro rose to within a whisker of parity with the dollar yesterday morning, before slipping back to $0.98 when the stock market fallout from the WorldCom accounting scandal proved less drastic than initially feared.

The European currency reached a 28-month high of $0.994 in early trading, spurred on by an expectation that WorldCom would push the Dow Jones Industrial Average into freefall, dragging the dollar in its wake.

When losses in the Dow settled at about 1.5 per cent, the US currency strengthened slightly.

"We didn't go through parity today because the complete collapse we were expecting in the Dow didn't materialise," said Mr Niall Dunne, financial markets economist with Ulster Bank. "People were fearing it would be worse."

Mr Dunne said technical considerations making $0.995 a key level at which to sell euros and buy dollars were also at play in holding the euro back from parity. This was, he added, "just as well", since such a rapid rise in the European currency would cause upset in the markets.

Predictions were still rife however that the magic one-for-one level would be breached before the weekend, with Mr Dunne acknowledging that Friday, a traditionally volatile day on the markets, could provide the occasion. "I won't be surprised if we see a run at it this week," he said, adding, however, that parity was unlikely to be sustainable at this time, since economic performance in the euro zone did not yet merit such a valuation.

"It might take three cracks at parity," he said.

Mr Robbie Kelleher, head of research at Davy Stockbrokers, said a breach of parity would only be a starting point for further falls in the dollar. "My feeling is that the dollar is overvalued," said Mr Kelleher, who believes the euro could reach as high as $1.20 in coming months, a valuation that would surpass the currency's 1999 launch value of $1.17.

Sterling, meanwhile, was more of an observer than a player yesterday, with the euro hitting a high of £0.652 before falling to £0.646 late in the afternoon, down slightly from Tuesday's £0.647.

Mr Dunne said the British currency was unlikely to move much beyond current levels in the short term, as the markets awaited news on Britain's entry to EMU.

Such a development had been pushed back, he said, by declining support for the euro in British industry, which is becoming increasingly comfortable with current sterling valuations.