THE euro has risen substantially after the resignation of the German minister for finance, Mr Oskar Lafontaine.

News of his departure was also welcomed here in the expectation that it would reduce pressure, with which Mr Lafontaine was associated, for a harmonisation of corporation tax rates.

The euro rallied strongly after yesterday's announcement, as did the German bond market. This led to speculation last night that a reduction in European interest rates may be in the offing. The European Central Bank had appeared loath to accede to Mr Lafontaine's demands for a cut for fear of being seen to respond to political pressure.

Mr Colin Hunt, chief economist at Goodbody Stockbrokers, said the resignation left the ECB free to make decisions about interest rates based on the fundamentals of the European economy.

Mr Lafontaine has been at odds with the ECB since his election last September and has repeatedly called for rate cuts to help Germany's jobless.

"This hands the credibility back to the ECB and means it is free to cut rates when needed," Mr Hunt said.

The euro began climbing as soon as the headline flashed across newswire screens and reached $1.1010 - the rate at which it subsequently closed - within an hour from $1.0820 just before the news. It was trading at $1.1030 in New York last night.

Mr Robin Marshall, head of research at Chase in London, said it was important to wait and see who replaced Mr Lafontaine.

"It doesn't solve the underlying policy issues in the euro zone, so the danger of the pressures between fiscal and monetary policy remains, but it does ease them. It probably also increases the chance of a rate cut from the ECB because it takes away this hectoring pressure that he was putting on the ECB."

Mr Hans Eichel (57) was named last night as Mr Lafontaine's likely successor by Chancellor, Mr Gerhard Schroder. He was ousted as SPD premier of Hesse state in an election last month when support for his coalition partners, the Greens, collapsed.

Mr Hunt pointed out that overall sentiment towards the euro should improve, as Mr Lafontaine was the main opponent of the Stability and Growth Pact, the agreement which limits the size of the fiscal deficits which member-states can run. "This increases the chances that the Stability Pact will be taken seriously," he added.

Mr Lafontaine had been at the centre of controversy since his election and has been viewed with suspicion by the markets. Apart from demanding interest rate cuts, he has been involved in confrontation with German businesses over plans to increase corporate taxes. However, this policy has been viewed with increasing scepticism by Mr Schroder. On Wednesday, he ordered his cabinet to avoid placing extra burdens on business and the German people.

"There will come a point where I will no longer take responsibility for such a policy," ministers quoted Mr Schroder as saying.

The resignation came amid threats by business leaders to move operations out of Germany because of threatened tax reforms.

The Minister for Finance, Mr McCreevy, said he regretted Mr Lafontaine's resignation. "This is an internal matter for the German administration," his spokeswoman added.