The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe's monetary union, which in January welcomes its 13th member - Slovenia, the former Yugoslav republic.

"After the launch, we expected growth to stabilise - but it has continued over five years," Antti Heinonen, head of the European Central Bank's bank notes directorate, told the Financial Times.

Although the ECB does not deliberately promote the international use of the euro, it has become popular in official foreign exchange reserves - even if it is far from challenging the dollar's lead as the most popular reserve currency.

News that euro notes are challenging the dollar may cheer eurozone politicians - even if it partly reflects the currency's strength - but it may have a dark side too. Fast growth in the highest denomination notes, especially the €500 note, has raised suspicions that they are popular among criminals, although the ECB plays down this factor.

By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time.

But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than €610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback.

Copyright The Financial Times Limited 2006

Slovenia's small size - its population is just 2m - means that the impact of its entry will be hard to separate from the usual spike in demand for cash around Christmas and New Year, according to Antti Heinonen, head of the European central bank's bank notes directorate. So what has driven rapid growth in euro notes?

After the 2002 launch, the rate of increase slowed, but has remained at or above 10 per cent a year. The exact reasons are unclear; even central banks do not know where their notes are or for what purposes they are used.

Mr Heinonen suggests several explanations. Within the eurozone, citizens may still be adjusting to the new currency. In terms of population, the eurozone, with 315m inhabitants, is larger than the US. Low interest and inflation rates have "reduced the opportunity cost of holding cash, rather than putting your money in a bank account", he says.

Eurozone citizens anyway like to hoard some cash, perhaps more than their US counterparts, especially if they have difficulty getting to an automated cash dispenser. Electronic payment systems remain far from universal.

Robust eurozone growth, which has matched that in the US in recent quarters, could have added to demand.

Other clues come from the popularity of different euro notes. In volume terms, €500 notes have seen the fastest growth; their number in circulation was rising at an annual rate of almost 14 per cent in November. The volume of low-denomination dollar notes means that in terms of individual notes in circulation, the dollar leads the euro, and the dollar has retained its title as "cash most used outside of its borders", says Mr Heinonen.

The popularity of high-value euro notes might result from their use by criminals, although the ECB does not put too much weight on such factors. "Clearly cash is used by criminals because it is an anonymous instrument," adds Mr Heinonen. "But to say that it would be more difficult to commit a crime if we didn't have high denomination notes would be to confuse cause and effect. If we didn't have the higher denominations, criminals would use the lower denominations - or other global currencies, such as the US dollar or Swiss franc."

The overseas demand for euro notes is clearer to see. Tourists travelling outside the eurozone are likely to have taken euro notes with them and not brought so many back. The notes have also become popular in European Union member states that hope to one day to join the eurozone. Kosovo and Montenegro have adopted the euro as their national currency, even though they are not yet EU members. In countries such as Russia and beyond, euros have gained acceptance.

And at least when it comes to overseas use, the ECB has some indications about the scale of demand. Using statistics on the net the value of euros shipped by financial institutions, the ECB estimates that the stock held outside the eurozone must be worth at least €55bn, and that is almost certainly too low an estimate given the net outflow accounted for by tourists.

The ECB estimates that between 10 and 20 per cent of the €600bn euro notes in circulation are held outside the eurozone.

Copyright The Financial Times Limited 2006

While the UAE's foreign-exchange reserves are relatively small at 24.9 billion dollars, "the statement follows a report late last week that Venezuelan energy minister Rafael Ramirez expressed interest in demanding euros instead of dollars for more of Venezuela's exported petroleum," he said.

"The statements are apparently reviving fears that the dollar is losing its appeal as an international currency."

The greenback pared its losses after official data showed that sales of new US homes rose 3.4 percent in November from October, while the backlog of unsold homes fell for a fourth straight month.

The figures raised hopes that a recent slump in the US housing market could be coming to an end, and might dissuade the Federal Reserve from cutting interest rates.

Kathy Lien at Forex Capital Management said the report on new home sales was positive for the dollar but that the market will pay close attention to Thursday's report on the much bigger market of existing home sales.

"However, with mortgage applications dropping to a five-month low last week and existing home sales being more of a lagging indicator, we remain skeptical of (the dollar's) potential strength," she said.

An analyst at Capital Spreads, Simon Denham, said that major currencies had fluctuated within narrow bands since early December and this was not about to change coming up to the end of year.

"We are still in the trading range of the last week or so, and although the dollar is slightly weaker this morning, we have in reality been drifting from the peaks seen in early December, when the death of the greenback was headline material," he said.

The yen stayed under pressure on Wednesday after comments from the Bank of Japan suggested inflation was not currently high enough to warrant a hike in interest rates in the short term.

In late New York trade, the dollar stood at 1.2258 Swiss francs from 1.2231 Tuesday.

The pound was being traded at 1.9562 dollars after 1.9536 late Tuesday.

The dollar fell to 118.63 yen at 7:17 a.m. in New York, from 119.15 late yesterday. The currency slid to $1.3158 versus the euro, from $1.3098. The euro traded at 156.09 yen, from 156.04, after touching a record 156.43 on Dec. 21. The dollar has risen 0.8 percent against the Japanese currency this year.

The U.A.E. will switch 8 percent of its reserves from dollars into euros before September, Sultan Bin Nasser al-Suwaidi said in a Dec. 24 interview in Abu Dhabi. The U.A.E. has started "in a limited way'' to sell its dollar reserves, he said.

The Gulf state is among oil exporters including Iran, Venezuela and Indonesia that are looking to shift their currency reserves into euros or price their oil products in the 12-nation currency.

U.S. Slowdown

The U.S. Conference Board's index of sentiment due tomorrow will probably drop to 102 this month from 102.9 in November, according to the median forecast of 48 economists surveyed by Bloomberg News. MasterCard Advisors also said holiday retail sales this year grew at a slower pace this year than in 2005.

"The data are likely to add to an economic slowdown scenario that may prompt a rate cut in the first quarter,'' said Masashi Kurabe, a currency manager in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. "The bias is to sell the dollar.''

The Fed has left borrowing costs at 5.25 percent for the past four policy meetings, after a two-year cycle of rate increases. The European Central Bank has raised rates six times in a year, to 3.5 percent. The Bank of Japan lifted its benchmark in July for the first time in almost six years, to 0.25 percent.

Interest-rate futures show traders see a 28 percent chance the Fed will lower its overnight target lending rate between banks by a quarter point to 5 percent in March, up from a 17 percent likelihood a week ago.

Japanese Rates

The yen's gains accelerated against the dollar after a Jiji Press report suggested the BOJ will push rates higher at its January meeting because of better-than-expected data yesterday.

Japan's government bonds fell the most in three weeks after the Jiji article. Reports yesterday showed an unexpected fall in the unemployment rate and a smaller-than-expected decline in household spending.

"The Jiji report is spurring yen buying,'' said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. "Expectations for an interest-rate hike had receded. So the Jiji report will have a big impact on the yen.'' Japan's currency may strengthen to 118 per dollar today, he said.

Jiji correctly predicted 10 days before the BOJ's meeting last week that policy makers would keep rates unchanged. The central bank will consider lifting the benchmark to 0.5 percent from 0.25 percent when it announces its next decision on Jan. 18, Jiji Press reported, citing unnamed sources.

Retail Sales

Governor Toshihiko Fukui told business leaders on Dec. 25 that the central bank will adjust policy if prices and the economy perform in line with forecasts.

Gains in the yen may be limited after a government report showed retail sales rose less than expected last month.

The currency is set for a second straight annual decline as interest rates in Japan, which are the lowest among major economies, prompt investors to seek higher returns offshore.

Traders have still cut bets that the Japanese central bank will raise borrowing costs in January. The household spending report showed an 11th month of declines and gains in consumer prices failed to beat forecasts.

"It's hard to find a reason to buy the yen,'' said Stephen Halmarick, co-head of economic and market analysis at Citigroup Australia in Sydney. "This is yet another set of disappointing numbers out of Japan.''

The dollar may extend declines after MasterCard Advisors said retail sales in the holiday season rose 3 percent, a slower pace than last year's 5.2 percent increase, as a cooling housing market and higher energy costs cut into spending.

The National Association of Manufacturers in the U.S. predicts slower economic growth will prompt the Fed to lower rates by a half-percentage point by the middle of 2007, the Wall Street Journal reported yesterday on its Web site, citing the Associated Press.

To contact the reporters on this story: Kabir Chibber in London at kchibber@bloomberg.net .

In January, investigators will release the first of several audits examining more than $12 billion in Katrina contracts (PDF). The charges range from political favoritism to limited opportunities for small and minority-owned firms, which initially got only 1.5 percent of the total work.

"Based on their track record, it wouldn't surprise me if we saw another billion more in waste," said Clark Kent Ervin, the Homeland Security Department's inspector general from 2003-2004. "I don't think sufficient progress has been made."

He called it inexcusable that the Bush administration would still have so many no-bid contracts. Under pressure last year, Federal Emergency Management Agency director David Paulison pledged to rebid many of the agreements, only to backtrack months later and reopen only a portion.

'Laziness, ineptitude ... nefarious'
Investigators are now examining whether some of the agreements - which in some cases were extended without warning rather than rebid - are still unfairly benefiting large firms.

"It's a combination of laziness, ineptitude and it may well be nefarious," Ervin said.

FEMA spokesman James McIntyre said the agency was working to fix its mistakes by awarding contracts for future disasters through competitive bidding. Paulison has said he welcomes additional oversight but cautioned against investigations that aren't based on "new evidence and allegations."

"As always, FEMA will work with Congress in all aspects to ensure that we are carrying out the agency's responsibilities," McIntyre said.

The Aug. 29, 2005, hurricane swept ashore in southern Louisiana, Mississippi and Alabama, leveling homes and businesses along the Gulf Coast. Its storm surge breached levees in New Orleans, unleashing a flood that left more than 1,300 people dead, hundreds of thousands homeless and tens of billions of dollars worth of damage.

A series of government investigations in the storm's wake faulted the Bush administration for underestimating the threat and failing to prepare by pre-negotiating contracts for basic supplies in what has become the nation's costliest disaster.

$1B estimate 'likely understated'
Earlier this month, the Government Accountability Office said its initial estimate of $1 billion in disaster aid waste was "likely understated," citing continuing problems in which FEMA doled out tens of millions of dollars in fraudulent housing assistance.

Democrats in Congress called for more accountability. When they take over in January, at least seven committees plan hearings or other oversight - from housing to disaster loans - on how the $88 billion approved for Katrina relief is being spent.

Among the current investigations:

* The propriety of four no-bid contracts together worth $400 million to Shaw Group Inc., Bechtel Group Inc., CH2M Hill Companies Ltd., and Fluor Corp. that were awarded without competition.

The contracts drew immediate criticism because of the companies' extensive political and government ties, prompting a promise last year from Paulison to rebid them. Instead, FEMA rebid only a portion and then extended their contracts once, if not twice - to $3.4 billion total - so the firms could finish their remaining Katrina work.

The four companies, which have denied that connections played a factor, were among six that also won new contracts after open bidding in August. The latest contracts are worth up to $250 million each for future disaster work.

* The propriety of 36 trailer contract awards designated for small and local businesses as part of Paulison's promise to rebid large contracts.

Homeland Security Inspector General Richard Skinner is reviewing whether some small and local businesses were unfairly shut out in favor of winners such as joint venture PRI-DJI. DJI stands for Del-Jen Inc., a subsidiary of Fluor, which has donated more than $930,000 to mostly Republican candidates since 2000.

'It's who you know'
"It's not what you know, what your expertise is. I don't even believe it's got much to do with price. It's who you know," contends Ken Edmonds, owner of River Parish RV Inc. in Louisiana, a company of 9 people whose application was rejected.

PRI, a minority-owned firm based in San Diego, said it is the "majority partner" with Del-Jen as part of a federal mentoring program offered by the Small Business Administration. The joint venture received four Katrina contracts worth up to $100 million each based on price and "knowledge of work with the federal government," president Frank Loscavio said.

* Whether small and minority-owned businesses were unfairly hurt after the Bush administration initially waived competition requirements.

For many weeks after the storm, minority firms received 1.5 percent of the total work - less than one-third of the 5 percent normally required - because they weren't allowed to bid for many of the emergency contracts.

The National Black Chamber of Commerce called the figure appalling because of the disproportionate number of poor, black people in the stricken Gulf Coast, prompting Sen. Olympia Snowe, R-Maine, and Rep. Donald Manzullo, R-Ill., to request GAO to investigate.

FEMA has since restored many of its competition rules, and the number of contracts given to minority firms is now about 8.8 percent, according to the agency.
© 2006 The Associated Press.