The debate about deflation and the falling dollar compounded the uncertainty in international currency markets yesterday.

The world is shifting from an era of structural inflation to one of deflation, according to Mr Eisuke Sakakibara, who is the former Japanese vice-finance minister and is still referred to as "Mr Yen".

Separately, Mr John Snow, US treasury secretary, warned that managing currencies was no route to prosperity.

He said that Europe and Japan should not blame the falling dollar for their economic troubles.

Mr Sakakibara, now a professor at Keio University, said Japan was the forerunner of this deflationary trend, but the United States and Europe were likely to follow.

"Even if we don't yet have \ deflation, you have to concede that we have disinflation," he said, attributing falling prices to rapid productivity gains in manufacturing, particularly in China.

"Deflation is a structural, not a monetary, phenomenon."

Mr Sakakibara said calls for the weakening of all three currency blocks - the dollar, the yen and the euro - were dangerous.

The euro, which peaked at $1.1623 against the dollar on Monday, remained volatile.

It slid to $1.146 in early Asian trading before rising as far as $1.156 in the European session and settling to close at $1.15 in New York.

Dollar bulls may have taken some comfort from the monthly Merrill Lynch fund manager survey where, for the first time, respondents felt the euro was more overvalued than undervalued.

Moreover, the percentage who felt the dollar was overvalued fell sharply to 13 per cent. - (Financial Times Service)