Just when the European Central Bank seems to be warming to cutting interest rates to boost the flagging euro zone economy prospects for an early move could be dashed by a renewed bout of euro weakness, economists said today.
The euro fell back below the key psychological level of $0.90 on Friday after seeming to have stabilised around $0.93 in recent weeks.
Commerzbank economist Mr Michael Schubert said: "The fall in the euro could pose a problem because it boosts imported inflation and that could delay a cut in ECB rates."
The ECB is the only major central bank in the world not to have cut its key rates in response to the sharp deterioriation in the global economic environment in recent months.
Normally higher interest rates provide a better return for investors and lower interest rates tend to lead to a fall in the value of a currency.
But the current gloom over the world economy and the slump in the global stock markets have turned such logic on its head.
The sharp cuts in US interest rates since the beginning of the year and the prospect of more have persuaded investors to place their money in dollar-demoninated assets because the hands-on approach by the US Federal Reserve is expected to lead to a rapid rebound in the US economy.
The perceived timidity of the ECB's approach would meanthe euro zone economy - currently growing at twice the pace of the US economy - could slow sharply in the months ahead.
"If the ECB does not act quickly the euro could fall further in value, increasing inflationary tensions in the region's economy", said economist at Bank of America Mr Jeremy Hawkins.
He added: "But if it ignores the high level of inflation and cut rates soon it will be accused of neglecting its duty of safeguarding price stability."