European Central Bank (ECB) president Mr Wim Duisenberg yesterday issued a thinly veiled warning that the Bank could intervene if the euro slides further against the dollar. Speaking in Frankfurt after a meeting of the ECB's governing council, Mr Duisenberg said the euro exchange rate was important in calculating the risk of inflation.

"Let me reiterate our position. We have a strong interest in a strong euro," he said.

Mr Duisenberg declined to answer questions about possible market intervention but his remarks follow comments by the Bundesbank president, Mr Ernst Welteke, warning the financial markets that European central banks had "considerable reserves" with which to support the euro.

The euro appreciated very slightly in the hours following the comments, trading at $85.02 late in the European day. This level has put markets on alert for another bout of intervention to support the currency.

Mr Duisenberg denied the euro's weakness against the dollar reflected a judgment on the ECB's lack of credibility. He said it was partly due to large investment flows from Europe to the US, which he described as a "temporary phenomenon".

Yesterday's meeting left interest rates unchanged at 4.5 per cent but Mr Duisenberg hinted that a further cut in interest rates could be on the way, perhaps within a month.

He said money supply growth was continuing to ease and sounded relaxed about the threat of inflation.

"Inflationary pressures will ease over the medium term, although this is likely - for some months to come - to be overshadowed by short-term increases in inflation that relate mainly to oil prices and the impact of animal diseases on food prices," he said.

Looking ahead to the introduction of euro notes and coins at the end of this year, Mr Duisenberg expressed confidence that prices would generally be rounded downwards. He did not expect the conversion to euro notes and coins to create significant inflationary pressures.

"We do not anticipate that the conversion itself will have a significant impact on inflation." Although he acknowledged that economic growth in the euro zone would be below 2.5 per cent this year, Mr Duisenberg insisted it remained robust. But he warned that wage restraint was crucial to ensuring that economic growth remained non-inflationary.

"Wage moderation will have to play an important role in containing inflationary pressures in the coming years. When looking back, the wage developments seen so far have been satisfactory. Looking forward, there is ongoing concern about the emergence of second-round effects, so that wage developments need to be monitored very closely," he said.