The euro has strengthened more than 8% against the US dollar since the start of this year and is hovering at record high levels, leading to concerns that EuropeÆs export-led recovery will be derailed.

Keith Wade, London-based chief economist at Schroders, says that while a stronger euro does pose some threat to exporters, this should be cushioned to an extent by the regionÆs growing exposure to Eastern Europe, Russia and Turkey. He adds that European companies continue to display strong earnings growth while valuations remain attractive.

The EU-15, EuropeÆs largest 15 economies, have dramatically increased trade with Central and Eastern Europe while at the same time reducing exposure to the United States.

ôThe key to our sanguine outlook is our non-consensus view that the European Central Bank will cut rates next year,ö Wade says. ôWe believe that the impact of the stronger euro on the economy that is already showing signs of slowing, albeit from very strong levels, will ultimately leave the ECB with little choice but to cut rates.ö

However, the monetary authoritiesÆ desire to build an inflation buffer against rising energy base effects will likely mean that ECB will wait a while before acting.

ôWe expect the ECB to cut rates by 25 basis points in both March and June of next year. This should bring the euro back to 1.35 against the US dollar by the end of 2008,ö he says.

At present, Schroders prefers domestic sectors and stocks on the whole in Europe, following a bottom-up approach based on a companyÆs fundamental strengths and its share price valuation.

Over at Aberdeen Asset management, London-based fund manager Tom Hooper says many European exporters are producing high value added capital goods that will continue to enjoy strong demand despite the stronger euro.

ôThe export goods produced by most European exporters are the kind of goods that will continue to be in demand, they are not extremely price sensitive,ö he says. ôThe strength of the euro has hardly dampened export growth.ö