The European Central Bank (ECB) is expected to cut interest rates when its governing council meets in Frankfurt today. Market analysts believe that the euro's recent rise against the dollar and the fear of a sustained downturn in the euro zone will persuade the ECB to cut rates by as much as 0.5 of a percentage point.

The euro breached $1.10 yesterday, reaching its highest level against the dollar for four years, making exports out of the euro zone more expensive and imports cheaper. A rise in the euro's value tends to dampen inflation, giving the ECB more room for manoeuvre in setting interest rates.

The dollar stayed weak yesterday - trading just below $1.10 in New York late yesterday - even as the US treasury secretary, Mr John Snow, voiced support for a strong dollar, a day after he sent the currency sharply lower by appearing to downplay its recent fall.

The dollar lost ground across the board and slipped to new four-year lows against both the euro and the Swiss franc after Mr Snow said during early Asian trading hours late on Tuesday that he was "not particularly concerned" about the decline.

Dealers said Snow's comments were enough to sow seeds of doubt about the US government's fidelity to a strong dollar, even though few believed that Snow was trying to send a signal that a weaker dollar was desired.

A treasury spokesman quickly put a temporary brake on the fall by saying Mr Snow still favoured a strong dollar and that "the secretary's position has not changed."

Belgium's finance minister, Mr Didier Reynders, said yesterday that the euro's rise could protect the euro zone from a possible oil shock and said that the ECB had room to cut rates.

"For the first time we are able to resist such an external shock, due to the euro. It's not really a problem for the population or for enterprises," he said.

The euro's rise has been viewed with alarm in Germany, the euro-zone's biggest exporting country, where business leaders have long called for a less restrictive monetary policy. The euro-zone's rule that national budget deficits must be below 3 per cent means that Berlin cannot cut taxes or increase public spending to stimulate the economy.

Germany's economics minister, Mr Wolfgang Clement, said this week that a euro rise above $1.10 could create difficulties for the German economy.

Today's meeting comes amid signs of discord within the ECB's governing council over the central bank's monetary policy. An internal review of the ECB's decision-making framework is due to report in July but many economists believe that the bank needs to rethink its policy.

Some members of the governing council are understood to favour a loosening of the ECB's inflation target, currently set at 2 per cent, and a reduction in the importance of money supply growth in determining monetary policy.