Ground Floor/Sheila O'Flanagan: Currencies are still the topic of choice among market traders and the only story in town as far as they're concerned.

Attention is still focused on the euro's inexorable rise and, the opposite side of that coin, the inexorable decline of the dollar and sterling.

US Treasury Secretary Mr John Snow gave loaded hints to traders that they could keep right on shorting dollars when he told a G7 meeting last weekend that its decline was "fairly modest".

Well, not against the euro, obviously, where the decline is around 25 per cent. But against an average of all the US's trading partners, the decline is definitely more modest at about 6 per cent.

Mr Snow was undoubtedly looking at recent inflation data which showed the consumer price index (CPI) had registered its biggest drop in 18 months at 0.3 per cent - against expectations of a decline of 0.1 per cent - when he decided to encourage dollar weakness.

Core CPI (which excludes food and energy prices) was flat for the second month in a row.

This has renewed fear of deflation in the States which, in turn, has increased the likelihood of the US cutting interest rates again.

The net result of this is that the gap between rates in the US and the euro zone could widen further and cause more traders to sell dollars and buy euros, putting the proceeds into euro-denominated paper, which my ex-bond colleagues are only too happy to sell.

The era of the strong-dollar policy is definitely over despite the additional pronouncements by Mr Snow that the treasury had "no conscious policy" to move the dollar in any direction.

So there's no reason to think the euro's appreciation against the dollar will change soon, no matter how overdone it might be.

Yet we know the euro zone is in big economic difficulties and there is a prospect of lower euro rates when (and if) the ECB finally decides it has "clarity" on the issues about which it feels wobbly. (Recent German GDP numbers, which imply the economy contracted by 0.2 per cent for the first three months of the year, should help.)

On the basis that clarity hits them over the head and rates are cut soon, there might be a reason for a shift out of euros and into dollars again, but at present traders are holding firm and can probably send the dollar still lower before deciding enough is enough.

From the US view, though, making imports more expensive isn't necessarily a bad thing. There's still a lot of capacity in the domestic economy and prices should stay low. Which brings us back to that fear of deflation. It's all knife-edge stuff at present. The one thing that probably keeps US policymakers happy enough is that there won't be a sustained flight out of US assets and into just about anything else - given that there's so little of anything else to choose from!

Meanwhile, in Britain, the topic of sterling and the euro has once again shifted from the economic box to the political box with UK chancellor Gordon Brown flexing his muscles on who gets to make the decision on when and if there will be a referendum on Britain joining the euro and whether the famous five economic tests have been met.

As I've said before, the tests are really of the "how long is a piece of string" variety and Mr Brown can as easily prove they've been met as not - if he can't, he can neither call himself a politician nor an economist. (I've spent coffee breaks with economists who argued vehemently against their pet theories just to prove that they could!)

But everyone knows Mr Brown is against taking Britain into the single currency now and that's where his conclusions will fall. The real question is whether there will be a referendum before the next election.

Having alienated half of Europe on his stance over the Iraq war, Tony Blair wants to renew and redeem his europhile credentials by supporting the single currency again. But since the debate is usually conducted by members of the press pasting europhobic headlines whenever the issue is mentioned, it's not going to be an easy ride for him.

In the meantime, though, British residents who have been used to getting about a 35 per cent discount every time they visit a euro-zone country are beginning to gripe about the effect of sterling's decline on their buying power.

Anyway, it'll be June 9th before Mr Brown gives us the benefit of his views on the piece of string theory, which gives traders lots of time to push sterling around the place (though at some point, lower) before changing their minds again.

It will be interesting to see what happens if he manages to slam the door on euro entry (not least in the reaction of Tony Blair).

That would allow sterling to strengthen again but would it manage to do that independently of dollar weakness? Because the euro-dollar relationship is, in fact, the key issue here. Britain is just a bit player.

If they decide they don't want to be part of the eurofest, will US traders switch out of euro paper and into British paper instead? British rates are, after all, higher than euro-zone rates but sterling is trading like a satellite US state rather than an independent economic entity.

The next date that the ECB is likely to signal a rate cut is June 5th, four days before Mr Brown gives his judgment on the currency. It's been a long time since intra-day currency trading has been in the spotlight but between now and June that's where the action will be. Makes a nice change from looking at equity markets.