The euro has risen by over a cent, triggered by news that euro zone inflation fell to 3 per cent in June.

The data led to a surge in buying as some traders even pinned their hopes on a rate cut as early as today. However, most expect the European Central Bank (ECB) to take no action today, deferring a reduction until another meeting.

Sterling also fell against the euro on news than Mr Kenneth Clarke is through to the final round of the Tory leadership election. A victory in the September ballot for Mr Clarke, who has even shared a platform with Prime Minister Tony Blair to extol the benefits of the single currency, would make UK membership of the euro zone more likely.

It would be good news for Ireland if Britain was to join the euro zone and would help to combat inflation. The strength of sterling has pushed up import prices and has boosted inflation over recent months. It would also remove the uncertainty around the volatile exchange rate and add what could be available ally to the ECB board.

The euro closed at $0.8708 from $0.8538 a day earlier and at 61.52p against sterling from 60.89p on Tuesday.

According to Mr Jim Power, investment director at Friends First, the testimony to Congress of the Fed chairman, Mr Alan Greenspan, also boosted the euro.

The testimony made clear that further caution regarding the US economy and its prospects of recovery is needed.

The Fed chairman told the House Financial Services Committee that six rate cuts already made by the Fed this year - as well as a tax cut and cheaper energy costs - should assist the economy as it tries to pull out of its slowdown later in 2001.

"The period of sub-par economic performance, however, is not yet over, and we are not yet free of the risk that economic weakness will be greater than currently anticipated, and require further policy response."

Meanwhile, inflation across the euro zone fell to 3 per cent in June from 3.4 per cent in May, increasing chances of a rate cut in the autumn.

Ireland has remained out of the top three for inflation. The Netherlands had the highest rate, at 5 per cent, followed by Portugal at 4.6 per cent and Greece at 4.5 per cent.

France and Denmark had the lowest rate of 2.2 per cent, while outside the euro zone inflation in the UK was only 1.7 per cent.

However, over 12 months, average Irish inflation is the highest in the EU at 4.8 per cent.

The overall direction in inflation will also be welcomed by the ECB. Compared with June 2000, the largest relative rises were in the UK, which went up from 0.8 per cent, in Sweden, where inflation rose from 1.4 per cent to 3 per cent and in Greece, where prices shot up by 4.5 per cent, from 2.2 per cent.

The biggest relative falls were in Luxembourg, where inflation fell to 2.7 per cent from 4.4 per cent and in Ireland, where inflation fell to 4.3 per cent from 5.4 per cent.

The lowest annual average up to June was in the UK, at 1 per cent, and Sweden and France at 1.9 per cent. The highest were in Ireland at 4.8 per cent, Portugal at 4.2 per cent and Spain and the Netherlands, both at 3.9 per cent.