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Friday, 1 February, 2002, 17:41 GMT
Inflation fears hit euro
A euro vending machine in Germany
Euro use is near-universal, but its value is dropping
One month after the introduction of euro notes and coins across 12 countries, the single currency is still in a "good-news/bad-news" situation.

The European Commission has trumpeted the quick adoption of the currency, pointing out that 95% of cash transactions in the eurozone are now euro-denominated - much more than its proponents had hoped.

But at the same time, the currency has continued to plunge on the foreign exchange markets.

And new preliminary data suggests that year-end inflation did spike as some had feared.

Just above lows

On Friday morning, the euro was hovering just under 86 US cents, just above its minimum for the year, and not much further above six-month lows.

Most of the euro's weakness is related to unexpected optimism over the dollar, but Europe's mood has been soured by fears over inflation.

In a preliminary estimate, the Commission announced that inflation in January was likely to have been 2.5%, up from the 2.1% seen in December.

The final January figure will not be available until 28 February.

The changeover of currencies brought about much rounding-up of prices throughout the eurozone, effectively producing hidden inflation.

Gap narrows

On the face of it, high inflation ought to point towards higher eurozone interest rates, and therefore a boost for the euro.

But in this case, such hopes may not be fulfilled.

The European Central Bank (ECB), with one eye on a looming recession, is seen as unlikely to react to what might just be a blip in eurozone prices.

But in the US, the Fed is expected to start raising its rates soon, narrowing the transatlantic rate gap and making the dollar relatively more attractive.

The BBC's Evan Davis
"The Euro is meant to keep prices low"
Dominic Forrest, European Consumer's Organisation
"It's kind of difficult to actually assess the impact of this changeover."
See also:

18 Jan 02 | Business
EU predicts eurozone rebound
17 Jan 02 | Business
Germany on brink of recession
22 Nov 01 | Business
Rich countries on the brink
08 Nov 01 | Business
ECB takes bold action
16 Oct 01 | Business
Jobs woe for German economy
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