Euros have been in demand on the currency markets

The euro has rallied strongly on the foreign exchange markets after investors took heart from its mostly trouble-free introduction as a cash currency.

In early Asian trade the currency soared to 119.7 yen - its highest level since August 1999 - before settling back to around 119.45 yen.

On Wednesday the single European currency had posted its biggest ever one-day gains against the pound in early trade, climbing 2.7% to 62.80p before slipping back to 62.40p.

The new currency also reached a two-week high of 90.66 US cents, but then dropped back to 90.40 in Asian trade.

Short-lived gains?

Analysts attributed the single currency's strong performance to the smoother than expected introduction of euro notes and coins, which began on 1 January before the foreign exchange markets opened for the new year.

"So far everything is working relatively smoothly, and so we are seeing a relief rally in the euro," said Michael Klawitter, senior currency strategist at WestLB.

A survey on Wednesday showing that the pace of output decline among eurozone companies slowed during December gave the single currency an added boost.

But analysts stressed that the euro was unlikely to hold onto its gains against the pound and dollar until there was firmer evidence of a sustained economic recovery in mainland Europe.

"The fact is there is more confidence in the UK and in our economic management than there is in euroland and its economic management," Richard Jeffrey, economist at ING Barings told the BBC.

Rate cuts unlikely for now

The introduction of euro notes and coins proceeded with few disruptions on 2 January, the first full working day of the year.

The most serious glitch came when Austria's entire cash machine network went down for two hours due to excessive customer demand for the new euro notes.

An increase in the value of the euro against other world currencies would make goods imported into the eurozone cheaper, helping to drive down inflation.

This would make it easier for the European Central Bank to deliver more interest rate cuts, which some economists argue are urgently needed to stimulate the eurozone's sluggish economy.

The European Central Bank's governing board is due to vote on Thursday on whether or not to change interest rates.

Adapted from bbc.co.uk: 3.1.02