The euro has fallen to new lows against the US dollar and sterling, making an interest rate cut less likely, despite mounting political pressure.

The euro dropped to $1.1180, yesterday from $1.1250 on Friday equating to a drop of more than 5 per cent since it came into existence only six weeks ago. At the same time, it fell to 68.43p against sterling in late trading from 69.06p on Monday - that equates to 86.9p sterling for the pound from 87.69p a day earlier.

The continuing weakness in the euro means an interest rate cut can virtually be ruled out, as it might only serve to further undermine the currency, economists said. Generally, no central bank liked to cut rates when the currency was under attack, Mr Jim Power, chief economist at Bank of Ireland noted.

He added that the markets were looking at a strong US economy compared with a weak European one. This meant that, while European rates may fall, US rates will not.

This should mean that the euro would remain under pressure. He added that there was a "distinct risk" that the euro would fall as low as $1.09 to $1.10 over the next month or so. The dollar is also strengthening against the yen following last week's Japanese rate cut bringing the key inter-bank rate to just 0.15 per cent. It now appears that the Japanese are targeting a weaker yen to deliver growth. Yesterday, the Japanese Ministry of Finance announced its trust fund would resume buying long-term debt, which means it is attempting to push long-term rates down below their current level of 2 per cent.

The Japanese vice-minister for finance, Mr Eisuke Sakakibara, or "Mr Yen" also insisted that he would tolerate a weaker yen, saying it was a natural reaction to lower interest rates. And to make sure the markets had no doubt about their intent, the Bank of Japan governor also welcomed the yen's reversal. The yen started Monday at 114.59 to the dollar and, by the European close yesterday, was trading at 118.20.

The pressure is also mounting on the European Central Bank (ECB), particularly as Germany's outspoken finance minister, Mr Oskar Lafontaine, is due to attend tomorrow's council meeting. Many people still believe that the co-ordinated round of rate cuts in December was a direct result of political pressure but a second positive result is unlikely for the politicians this time.

Last week Mr Lafontaine told the 11 euro zone finance ministers that both jobs and economic growth were threatened by deflationary pressures and called on the ECB to respond.

Monetary policy was certainly the preferred instrument to respond to this shock. If it was not used, fiscal measures could not be ruled out, because the option of doing nothing could turn out to be extremely expensive, Mr Lafontaine said.

But many economists reject this. According to Mr Power, sluggish growth and high unemployment have nothing to do with 3 per cent rates. "Even if rates fall to 2 per cent or 2.5 per cent nothing much will change," he said.

Mr Lafontaine should be aiming at structural reform of the services sector in Germany and an improved environment for job creation which means a seriously lower tax burden on the corporate sector, according to Mr Power