Cyprus and Malta adopt the euro

A pavement is adorned with the euro in Malta's capital Valletta

Two Mediterranean island states, Cyprus and Malta, have begun using the euro, joining 13 other countries.

The countries' leaders made symbolic withdrawals of euros from cash machines just minutes into the New Year.

Major bank branches opened for a few hours in Cyprus despite the New Year holiday. The Maltese celebrated the euro's arrival with fireworks.

Cyprus and Malta have added just 1.2 million people to the number of Europeans using the single currency.

But they will have equal voting rights with the other 13 eurozone members at the European Central Bank.

Careful preparations

Both island nations prepared for the changeover thoroughly.

FACTS ABOUT MALTA Population: 407,000 Size: 316 sq km (122 sq miles), the smallest member of the eurozone GDP: 4.8bn euros (0.06% of total eurozone GDP) Biggest earners: Tourism, manufacturing but growth in financial services, IT Prime Minister Lawrence Gonzi is also Finance Minister Independent from UK in 1964

In Cyprus 300,000 currency converters were sent to households, while in Malta a euro telephone hotline has been running alongside 59 "euro centres".

The switchover in Cyprus will highlight the decades-old division between the south and the Turkish-controlled north of the island.

The Turkish lira remains the primary currency in northern Cyprus, which is outside the European Union and is recognised only by Turkey.

But Cyprus' euro coins are inscribed in both Greek and Turkish.

Aware of the previous experiences of some other eurozone members, Cyprus and Malta are watching retailers to ensure they do not use the changeover to round up their prices, contributing to inflation.

Euros will be accepted in Turkish-controlled northern Cyprus

The Cypriot government urged companies to round their prices down, while Malta signed 12 price stabilisation agreements with importers, which will last until March 2008.

Both the Maltese lira and the Cyprus pound will be legal tender until the end of January.

Commercial banks in Malta will exchange Maltese lira into euros free of charge until the end of March, and the central bank will allow exchange of lira notes until 2018.

In Cyprus, euros can be exchanged free of charge until the end of June and the central bank will allow exchange of pound notes until 2017.

Big benefits

Scrapping currency exchange costs and adopting a major currency raise hopes of a big boost to the islands' industries.

FACTS ABOUT CYPRUS Population: 778,000 (Greek Cypriots) Size (combined): 9,251 sq km (3,572 sq miles) GDP: 15.2bn euros (0.17% of total eurozone GDP) Biggest earners: Finance and tourism account for almost 80% GDP Independent from UK in 1960, Turkish northern Cyprus not part of EU

Malta is already enjoying a tourism boom, with double-digit growth expected this year, largely due to the arrival of low-cost airlines.

But it is also planning to become a magnet for hi-tech investment.

Several pharmaceutical companies have established research centres in Malta to develop generic copies of patented drugs.

And the German airline Lufthansa signed an agreement in 2007 for Malta to maintain and overhaul its planes.

The Cypriot Finance Minister, Michalis Sarris, has said the euro will benefit consumers and businesses alike because of the eurozone's low inflation, low interest rates and large market.

In the Turkish-controlled north many businesses have already begun accepting the euro and cross-border commerce is flourishing.

In 2003, the Turkish Cypriot authorities opened crossing points, prompting Turkish Cypriot shoppers to go south in search of greater choice and Greek Cypriots to head north for bargains and casinos.

The euro will also become legal tender on British military bases in Cyprus, the first part of sovereign British territory to adopt the currency.

Although the bases at Dhekelia, Episkopi and RAF Akrotiri are not officially part of the European Union, an estimated 10,000 Cypriots live or work there.

Residents use the shops, cafes and beaches on the bases, so the authorities in the sovereign base areas have decided to adopt the same rules as the Cypriot government.

US dollar touches a new euro low

The US dollar tumbled to yet another new low against the euro, as speculation mounted that US interest rates would be cut again next week.

The euro hit $1.4394 by late trade in New York, breaking the record set last Friday, when one euro bought $1.4319.

And the pound hit a three-month high against the dollar at 2.0574.

A slew of weak data - including a drop-off in durable goods sales and plummeting demand for new homes - has underlined woes in the US economy.

Rate cut risks

The Federal Reserve is due to meet next week, having last month reduced interest rates from 5.25% to 4.75% in a bid to rejuvenate the economy.

And many observers expect a further rate cut to at least 4.25% as policymakers try to lift the economy, which is showing increasing signs of suffering from a slump in house prices and higher credit costs.

"The run of downbeat economic data out of the US is underlining the fact that the Fed's last rate cut of 50 basis points clearly hasn't been sufficient to kick-start demand," said CMC Markets analyst James Hughes.

However, there are risks associated with further rate cuts, economists say.

While they can jump-start the economy, they can also weaken a currency as they encourage investors to transfer funds to currencies where they can get higher returns.

And there is a risk of inflation becoming a greater problem if money is made cheaper to borrow, encouraging more consumer spending and takeover activity.

Dollar stays near record euro low

The US dollar hovered near record lows against the euro by close of trade in New York on Friday, as expectations over a US interest rate cut increased.

One euro was worth $1.4265 by mid-afternoon in the US, after the greenback sank just short of $1.4320.

Analysts said a rise in US unemployment adds to chances of an interest rate cut when The Federal Reserve meets in October, in a bid to boost the economy.

Against Japan's yen, the dollar stayed near three-week lows, at 114.77 yen.

Rejuvenate confidence

Commentators now say the Fed could well reduce rates from 4.75% to 4.5%.

The dollar has been sliding since the Federal Reserve cut rates from 5.25% to 4.75% in September to help rejuvenate confidence in the world's largest economy.

This followed a summer of turmoil in the world's credit markets, sparked by record loan defaults in the US sub-prime mortgage sector.

Since then, a raft of mostly disappointing economic news and soft inflation figures has prompted the anticipation of further rate cuts.

While lowering borrowing costs can jump start the economy, it can also have an adverse impact as investors seek to place money in economies where the returns are higher.