Europe's central bankers meet in Frankfurt this morning to decide what action they should take to boost the value of the euro.
The currency rose against the dollar and sterling yesterday amid continuing speculation that the European Central Bank (ECB) may intervene in the markets to prop it up and reports that the Bank's governing council is about to change the way it sets interest rates.
The euro rose to $0.9122 in afternoon trading and nudged towards 59p against sterling following a report in the Frankfurt-based Borsen Zeitung that the ECB was "intensively considering" shifting to variable rate tenders from its current fixed-rate system.
This would give the markets more influence on interest rates, as commercial banks would declare to the ECB how much they wished to borrow and at what rate of interest.
This would almost certainly drive interest rates higher and would create uncertainty in the markets, which could help to push up the euro's exchange rate.
The ECB has been engaged for some time in an internal debate over what to do about the growing problem of overbidding - where banks bid for 50 or 100 times more liquidity than they actually need.
At a time when interest rates are expected to rise, banks try to borrow as much as possible at a low, fixed level.
Ms Sirkka Haemaelaeinen, a member of the ECB's executive board, referred to the problem of overbidding at a conference in Frankfurt last weekend. "If we adopted the more market-oriented variable rate tender procedure, the problem would not exist.
"However, the well-known advantage of the fixed rate tender procedure is the clear signalling of the monetary policy stance. We have to address this issue, in one way or another, in the near future," she said.
Even if the governing council decides against a shift to variable rate tenders today, ECB president Mr Wim Duisenberg will almost certainly indicate its thinking on the issue at his monthly press conference this afternoon.
Mr Duisenberg will also be questioned about whether the ECB is considering intervening in the markets to prop up the euro, as many currency traders hope.
Most analysts regard an interest rate hike today as unlikely because the last increase came just two weeks ago.
But Mr Duisenberg will have to give some indication that the ECB is prepared to take action in support of the euro if the currency's recent gains are not to disappear.
Analysts believe the euro must remain comfortably above $0.90 to keep its recent recovery intact and that its downward trend will not have turned until it moves above $0.94.
Efforts by Europe's politicians and central bankers to talk up the currency have so far failed to impress the markets, but the French Foreign Minister, Mr Hubert Vedrine, said yesterday that the euro's troubles could inspire politicians to take a more imaginative approach to maximising their economic influence.
Linking the euro's troubles to the debate over reform of EU institutions, Mr Vedrine said eurozone states needed a stronger, more cohesive voice and strategy.
"The current situation will bring something about. It's an episode that inspires creativity. We're keeping our heads but what the euro needs is a political pilot," he said.
