The reaction of the euro to the outcome of deliberations today by the European Central Bank (ECB) may reveal a curious paradox. Analysts have for some time believed that the weak euro has been one of the factors reducing the need for the ECB to cut interest rates.

But a growing feeling in the financial markets is that if the ECB does cut, and particularly if a cut is accompanied by a strong impression that the aim is to kick-start economic growth, the euro may rise.

Economic theory says that falls in interest rates lower the yield on assets, making them less attractive to investors. Other things being equal, this tends to lead to a fall in the currency. The higher inflation which may follow interest rate cuts also weakens currencies, as they need to fall to let the economy regain competitiveness.

But in a low-inflation environment, where economic growth is at a premium, a cut in short-term interest rates may push up interest rate expectations over the next couple of years by raising hopes of faster growth ahead. This may cause the currency to rise.

Such effects on currencies have been evident in the foreign exchange markets in recent months. Sterling has remained stubbornly high despite five UK interest rate cuts in the past six months, often rallying immediately after the announcement or during the following day.

The Canadian dollar and Swedish krona have also risen immediately after recent interest rate cuts, even though both moves were largely unexpected by the market.

The US dollar also benefited from the US Federal Reserve steadying the market's nerves with interest rate cuts late last year.

"In another environment, a cut in interest rates might have caused long bond yields to rise because of expected higher inflation and lack of credibility," says Mr Nick Parsons, chief currency strategist at Paribas in London.

"But at the moment, with global inflation so low, currencies are trading off expectations of relative growth rates."

Mr Parsons is one of a growing band in the markets who believe that a cut today may strengthen the euro.

"It could well be that if the ECB cuts rates, the improved prospects for a recovery in output later this year support the currency," says Mr Michael Wallace, currency manager at Standard and Poor's MMS. A cut would help the euro-zone economy move away from a period of "sustained stagnation", he says.

Others think that, while interest rate cuts can help currencies, the euro-zone economy is not yet in a position to benefit.

"There are two sorts of rate cuts," says Mr Kit Juckes, head of bonds and currencies at NatWest GFM in London. "One is the sort that have helped the Swedish krona and the Canadian dollar recently, where the cuts have been seen as supporting growth and making future cuts less likely."

But Mr Juckes said a cut by the ECB would be more like recent reductions in interest rates by the Czech central bank, or the slow grind towards zero of Japanese overnight interest rates over the past year.

"In this case, the market takes the move as a sign of weakness and as evidence that there are more cuts to come," he adds.

The largest imponderable is whether the ECB itself signs up to the view that lower interest rates could support the euro. Although ECB officials have played down the significance of the currency's weakness, comments this week by ECB board member Mr Jean-Claude Trichet suggest they will be reluctant to let it fall much more.