The so-called Y2K computer bug was a no show on the foreign exchanges on Monday as computer systems handled currency dealing on the first day of the new year without any problems. The European Central Bank said all systems, including the TARGET real-time gross settlement system, were functioning correctly.

"We always said that if there are no real problems with the systems trading should pick up quite smoothly and this is exactly what is happening," said Heering Ligthart, president of the ACI, the foreign exchange industry's umbrella organisation.

As Y2K moved off the radar screen, economic fundamentals began to come back into focus in the currency markets.

Analysts said the economic outlook was far more positive at the start of the single currency's second year than it had been at its launch - a view reinforced by the batch of upbeat euro zone purchasing managers' surveys released on Monday.The reports fanned expectations that the euro, which has lost 14 percent of its value against the dollar since its 1999 launch, would claw back ground in 2000.

"The systems all seem to be working perfectly even thoughthe volumes that are going through are not that large, so people are going to be looking at the data again," said Frederick Janson, spot trader at Credit Agricole Indosuez in London.

"There is a sense that things are more positive for the eurothan they were over the last six months."

Euro bulls await more liquid markets

Euro zone politicians and central bankers have wasted notime hammering home this point in the first few days of the New Year, with ECB President Wim Duisenberg, German Finance Minister Hans Eichel, and Bank of France Governor Jean Claude Trichet all noting the euro's potential to rise.

Analysts said the euro could also be bolstered against thedollar by any reversal of safe-haven flows into the dollar and US Bonds in the run up to the New Year, when many detected investors parking their money in markets which they perceived as the easiest to get out of in the event of a Y2K-related crisis.

However, dealing volumes were still depressed on Monday and this was seen as normal immediately after the holiday period and with London markets still closed. Those looking for the euro to rise may have to wait until liquidity returns to normal, analysts said.The euro made a brief foray to a two-week high of $1.0185during Asian trading on Monday but had retreated about a cent by the European midsession amid thin trading conditions.