US Federal Reserve chairman Mr Alan Greenspan said yesterday that while the euro was a sound currency, the dollar would remain a more attractive international currency because investors believed that productivity growth in the United States would continue to exceed that of the euro zone.

Mr Greenspan forecast that US productivity growth will be slightly positive in the current quarter and that despite September 11th, "there is no evidence at this stage from the data we have to date" that it would decline.

"Clearly the euro readily meets all the key qualifications for a major international currency. Indeed, there can be little doubt that the euro is a sound currency," Mr Greenspan told the Euro 50 Group in Washington.

But "the evident strengthened demand for the dollar, relative to the euro, has reflected a market expectation that productivity growth in the United States is likely to be greater than that in continental Europe in the years ahead.

"The steady flow of capital from Europe to the United States in recent years is, presumably, the consequence of Europeans finding many investments in the United States persistently more attractive than those at home."

Initial expectations that the euro would replace the dollar in many portfolios, including those of central banks, were "probably overstated", Mr Greenspan said. He noted that through the first year of the euro's existence, the weakening of its dollar exchange rate was widely attributable to a booming US economy. But contrary to expectations, the euro has not materially strengthened as the US economy has weakened. Mr Greenspan pointed to tougher labour laws in the euro zone as one of the reasons firms could not downsize and increase productivity as readily as in the US.

New technologies could be applied more efficiently in the US where the level of employment "has turned out to be higher as firms find hiring less risky and, hence, are more willing to add employees to their rosters." Other factors in the consistent weakness of the euro included regulatory arguments and legal differences across borders that have hampered equity trading and securities lending.