Euro strength divides market opinion

AS the euro continues to threaten new highs against the dollar eyes are increasingly focussed on a rate cut from the European Central Bank.

Having hit a new high of $1.1914, the strongest level since its flotation four years ago, the euro lost some ground to the dollar as markets reopened in the US after the bank holiday weekend.

By late yesterday afternoon the dollar was trading at $1.1852 as some support for the dollar re-emerged in the markets.

Forecasters see the slight gain yesterday as a minor glitch that still leaves the euro up 15% against the US currency since the start of the year.

The continuing rise in the euro increased speculation of an ECB rate cut either next week or soon after and Austin Hughes of IIB Bank said the case is rock solid for a cut of 0.5% at this stage by the ECB.

While that may ease some of the currency pressure as investors divert back to dollar instruments, experts fear the slide will continue indefinitely.

Several weeks back a US currency expert said it was possible the euro could go to $1.25 in the weeks ahead, but so far it hasn’t reached the psychological $1.20 barrier.

If the currency reached that target it could see the dollar continue its slide in the months ahead.

Some currency experts belive the eurozone can live with an exchange rate of $1.40 but thereafter the problems for exporters and economic growth could be very severe.

In a recent analysis the National Institute of Economic and Social Research, the macro economic think-tank in Britain, forecast that if the euro rises to levels equivalent to the European currencies peak of roughly $1.40 to the euro, there would be a better than even chance that the eurozone would drift into deflation.

At current levels however the ECB bosses are sanguine.

They believe the euro can live comfortably with a $1.18 exchange against the dollar without any major threat implied by such a figure.

In Germany, the Bundesbank president, Ernst Weltke said the euro hasn’t gained enough for it to threaten exports from the region. He described an exchange rate of $1.18 as “competitively neutral”.

Mr Weltke’s views were supported by ECB vice president Lucas Papademos in a speech to the International Club of Economic Journalists.

Mr Papademos pointed out that the “strength of the euro does reflect better the economic fundamentals of the euro area and present levels consistent with historical averages of the last 15 years”.

While that may be so, economists here are seriously worried that the slide of the dollar could cost us thousands of jobs, even if interest rates are cut by 0.5%.

At this stage Irish exporters who have enjoyed a huge advantage over their competitors in global markets have seen their competitive base eroded by about 15% in dollar terms.

The exporters are also hurting within the sterling market as the British currency is also continuing to slide.

They also have to compete with British companies in the eurozone, where these companies now have the upper hand.