Seconds out for round two. Following last Friday's dramatic intervention by the world's most powerful central banks in support of the euro, the finance ministers of the main industrial economies signalled clearly over the weekend that they would continue to support the currency and would intervene further, if necessary, to prop it up. The euro gained a couple of cents following Friday's move, but the key factor is whether these gains can be built on in the weeks ahead.
The finance ministers of the Group of Seven (G7) said they would monitor the currency markets closely, adding in typically dry prose that they would "co-operate in exchange markets as appropriate". In other words further central bank intervention - where the main banks step into the market to sell dollars and yen and buy euros - is likely. This should at least give investors pause for thought before selling euros on the market. However the mood in the market will be nervous in the days ahead, particularly ahead of Thursday's Danish referendum on the currency.
By intervening the major central banks are, in a sense, taking on the markets. However it would be wrong to compare the current situation with the currency crisis of the early 1990s. Then, the central banks were taking on speculators who were seeking to make large windfall gains by betting that certain currencies could not survive inside the exchange rate mechanism.
The recent pressure on the euro has a different cause. It has been mainly caused by investment flows moving out of Europe and into the US. Big investors have been pumping money into the US equity market, while many European companies are also investing in setting up operations in the US. These flows have been considerably larger than the amounts of money coming from the US into Europe, leading to the decline of the euro against the dollar.
International policymakers know that they cannot reverse this trend overnight. But they clearly now believe that on any reasonable yardstick the euro is undervalued. The support of the US Federal Reserve Board - the key factor in Friday's intervention - sends a powerful message that the US administration takes the same view.
In the long term, the key factor in the euro's fortunes will be the health of the main euro zone economies and of their investment markets. If Europe's big economies are firmly on the road to recovery - and to tackling some of their underlying structural problems - then the outlook for the euro will be much brighter. As yet, investors have to be convinced that this is the case. However evidence is growing that the euro zone recovery is well founded and concerns are building about some elements of the US economy. Perhaps we are now at, or close to, the turning point for the euro's fortunes.
Following the intervention by the central banks on Friday, another significant policy move was made late that evening, when President Clinton announced that the US would release 30 million barrels of oil from its strategic reserves, a move designed to push down international crude prices. The G7 ministers followed this up with a call on OPEC to help to bring down prices. Mr Clinton's move is significant and OPEC can be expected to pump more crude in the months ahead. But with oil reserves low in much of the industrialised world, there is still a risk of higher oil prices in the months ahead, particularly if the Northern hemisphere has a cold winter. A number of the G7 ministers identified this as the most serious threat to an otherwise reasonably bright outlook for the main industrial economies.
The Government here will welcome the international action on oil prices and the euro, as they have been two key factors in pushing up the inflation rate. A combination of a rising euro and falling oil prices would do much to improve the outlook for inflation. Unfortunately it is still too early to forecast with confidence that this will happen. Even if oil prices do fall and the euro starts to recover, the impact on the inflation rate will be gradual and will not happen soon enough to lessen the pressures now on the Programme for Prosperity and Fairness, which will be discussed in detail by the social partners this week.