For many investors, the euro arrived about three years ago. But it appears that the imminent arrival of euro notes and coins is forcing some people to become investors as they try to find ways to legitimise legacy currency that has been hidden under the mattress.

Since January 1st 1999 when the currencies of 11 euro zone countries (now 12 with the inclusion of Greece) were locked within a fixed exchange rate system, Irish investors could invest in shares and property in euro-zone countries without any risk of losing out because of exchange rate movements.

Irish share prices are now quoted in euro and Irish investors can buy shares in any of the 12 euro-zone countries without incurring any currency risk.

In addition, there is the advantage of greater equity price transparency with shares in all 12 countries quoted in the same currency.

The downside for Irish share prices has been the diversification of Irish fund managers out of Irish equities and into European shares with the removal of exchange rate risk on these investments.

While diversification started as early as 1991 when exchange controls were removed from pension funds, it accelerated after the fixing of European exchange rates in 1999.

In that year the Irish equity market underperformed as Irish fund managers sold off Irish equities to diversify their portfolios into European shares. This sell-off slowed sharply in the first half of this year as fund managers reacted to the poor performance of European markets.

But fund managers say diversification will continue. About 18 per cent on average of each Irish pension fund is invested in Irish equities compared with about 35 per cent in 1991. Some fund managers expect this proportion to fall to between 10 per cent and 13 per cent over the next three years.

How quickly it will happen will depend on the performance of European markets - diversification will speed up if European markets improve.

Fund managers are diversifying to get access to a broader range of investment sectors and companies than are available in the Irish market.

As one fund manager pointed out there is very little potential in the Irish equity market to build up reasonable investment exposures to the consumer goods, luxury goods, insurance, motor and a number of other sectors.

About 60 per cent of the Irish market is made up of the banks, pharmaceuticals (Elan) and builders (CRH).

Diversification reduces the sectoral and share-specific risk from investing in a narrow range of sectors and companies. With the arrival of the euro, individual retail investors have also been able to take advantage of broadening their equity portfolios without incurring the currency risk, which previously had to be factored into any investment outside the Irish market.

While some Irish retail investors have already started to buy euro-zone shares, stockbrokers feel the arrival of euro notes and coins will provide the psychological boost to other shareholders to look outside the Irish market.

But the arrival of the notes and coins has forced people with large sums of legacy currencies to find ways to convert their cash before the legacy currencies go out of circulation.

A huge increase in cash purchases of paintings, antiques and electrical and white goods are being reported. It is now more difficult to launder this cash through the purchase of shares, property, or some other investments with the reporting requirements under money-laundering legislation.

The euro has resulted in a sharp fall in Irish interest rates, which has boosted some sectors of the economy and helped Irish share prices.

When the European Central Bank took over monetary policy it set a single interest rate for the euro-zone member countries and Irish rates had to come down to converge to the European average. At a current 3.25 per cent, the European base rate means one of the lowest ever interest rates for the Irish economy.