The euro had a volatile day - being sold off as Russian President Boris Yeltsin sacked his prime minister and then bought back again as news emerged that the US Treasury Secretary had resigned.

As a result, the euro closed the European session at $1.0670, having weakened to $1.0630 on Mr Yevgeny Primakov's sacking, and then bouncing back to $1.0733 as rumours of Mr Robert Rubin's resignation swept the market. However, the dollar recovered on confirmation that Mr Rubin would be leaving in July as part of a planned re-entry to the private sector and that he was being replaced by his deputy, Mr Larry Summers.

At the same time the US currency weakened against sterling, following publication of the Bank of England's inflation report. It closed at 65.80p from 66.18p a day earlier. The pound closed at 83.70p against sterling from 84.02p a day earlier.

According to Mr Jim Power, chief economist at Bank of Ireland, Mr Summers is likely to pursue the same polices as Mr Rubin despite their very different backgrounds.

"It is likely that Mr Summers will continue the combination of a strong dollar, and persuading the Japanese and Europeans to stimulate their economies aggressively."

Meanwhile, sterling gained even more strength against the euro as the markets continue to test the resolve of the Bank of England.

In its inflation report, the bank sees signs of economic recovery and said the inflation target of 2.5 per cent is achievable. But it also warned that if sterling strength is sustained there is a probability that the inflation target would be undershot thereby necessitating lower rates.

According to Mr Power, the markets are now simply pushing sterling higher in order to test the bank's resolve and see if they can provoke another rate cut.