Official interest rate policy has recently jumped to centre stage yet again if one is to judge from the amount of debate among economists and financial commentators.

This heightened focus on interest rate policy in part reflects the fact that post the summer recess central bankers are likely to refocus on the future direction that interest rate policy should take.

However, possibly of more significance is the fact that currency markets have recently entered a period of turbulence after months of relative calm.

Up to recent weeks, the euro had enjoyed a period of relative strength where it had managed to strengthen to around 0.95 to the US dollar. This seemed to have been achieved on foot of economic reports from Europe that pointed to growing economic momentum across the euro zone.

Recent economic reports showing falling employment and strong output growth have bolstered confidence in the robustness of the European economic recovery. Despite this positive economic news, the euro has begun to slide yet again and there is now talk that the currency could well retest its all-time lows versus the dollar.

Again the story remains that no matter how well the European economy performs, the US economy seems to do even better. US economic growth has remained well above the European rate and as yet shows only tentative signs of slowing down.

Financial market commentators are divided as to whether the US Federal Reserve will soon push up US interest rates beyond the current 6.5 per cent. Despite continued strong economic growth, inflation has stayed low, leading some analysts to conclude that US interest rates won't rise in the near future.

In contrast, in Europe the only issue seems to be when and by how much will the European Central Bank (ECB) raise rates. Inflation is creeping up steadily across the euro zone and euro interest rates are still low when compared with sterling and dollar rates. The recent weakness in the currency adds another reason to raise interest rates. However, the ECB does not seem to have an exchange rate target and its stance towards the currency up to now can best be described as one of benign neglect.

The ECB's only stated interest in the international value of the euro is its impact on European inflation.

Letting the currency find its own level certainly has merit.

However, now that inflation has begun to creep up, any further euro weakness could well set alarm bells ringing in the ECB.

Unfortunately, the ECB is in something of a catch-22 situation. If it is seen to be raising interest rates to protect the euro exchange rate, market participants will then assume that there is an exchange-rate target.

History shows that if interest rates are to be used to influence the value of a currency, then they ultimately have to be raised by several percentage points if the strategy is to have any effect.

If, on the other hand, the ECB is viewed as being indifferent to the fate of the currency, speculative selling of the euro could well build up, pushing it to fresh lows.

On balance, the ECB is likely to continue with its policy of focusing on the control of domestic inflation.

Nevertheless, the ongoing weakness of the euro will almost certainly accelerate the pace of interest rate rises and ultimately the peak in the current cycle could well turn out to be far higher than current expectations.