Sharp fall in value of European shares

EXPORTERS hit by the rise in the euro can expect little relief over the next 12 months with some forecasters suggesting an exchange rate of $1.30 by early next year.

Fears of the dollar's continuing slide has resulted in sharp falls in the value of European shares in recent days as the rise in the euro raises further concerns about European economic growth.

If the dollar continues to slide then exports and economic growth would be imperilled in Ireland as well as in the rest of Europe, experts warned.

With comments from US treasury secretary John Snow suggesting the government was happy with a weaker dollar which will boost US exports and help ease its mounting deficit.

Over the next 12 months the consensus forecast has moved up from $1.09 last month to $1.14 with some analysts forecasting a euro/dollar exchange rate of $1.30 by spring 2004.

In the past few days the euro has broken through its official opening rate of $1.17 achieved on its first day of trading in 1999.

So far it has failed to hit its previous high of $1.17.47 but the current state of the markets suggest it is only a matter of time before that happens.

Alan McQuaid of Bloxham Stockbrokers believes a rate of $1.20 to the dollar will be achieved before the year is out while Dan McLaughlin of Bank of Ireland has been forced to revise his view of the dollar's ability to recover.

In his latest review of the situation Dr McLauhglin says that the dollar would recover to $1.05 by end of June is now "unattainable" and he is predicting a euro rate of $1.15 by then and a continuing modest slide to $1.10 by the year end in contrast to the more bullish forecasts out of the states where some expect to see the dollar fall to $1.25 against the euro in the coming months from current levels of around $1.17.

McLaughlin says the view that currency speculation is driving the markets only partly explains the current situation. Global financier George Soros's comment saying he had abandoned the dollar will not have helped short term sentiment given his global standing as a currency trader.

But the disparity in interest rates between the dollar and the euro-zone economies is a key factor driving the dollar lower experts suggest.

At present the euro is benefiting from interest rates of 2.5% against 1.25% for the US and billions of dollars are flowing into Euro bonds where yields are higher.

That scenario according to Dr McLaughlin has a major bearing on the current exchange rates more than equity sentiment or Foreign Direct Investment.

However the basis exists for a weaker euro in the near future.

It will be prompted in a post war equities rally and a further cut in ECB rates possibly by as much as 0.5% in either June or July.