Euro may be hit by stiff correction, reports warn

THE euro may face a stiff correction in the period ahead, according to two reports issued yesterday.

Bank of Ireland is forecasting a dip to 84p sterling, down from its high of 98p with the euro currently worth about 87p.

It has also revised its euro/dollar exchange rate down for the period to the end of March 2010.

Three years ago the euro bought under 66p, but by December 2008 the slide in the British currency had pushed the euro up to 98p, said Dan McLaughlin, chief economist, Bank of Ireland, in a new analysis of the euro.

In trading yesterday the euro was trading around 87p while the dollar lost some ground to the euro as fears eased over the Greek financial crisis.

The loss of 30% in sterling’s value over the past two years has been hugely damaging for Irish exports, where the UK is still a key export market.

Over 40% of food and drink exports are to Britain and the sector has suffered badly as a result. Food exports fell by €1bn in 2009, Bord Bia figures show.

Citigroup meanwhile said the euro may face a “correction” that will drive the currency to its lowest level since May. The euro traded at $1.3926 early yesterday and last traded below $1.37 on 20 May 2009.

The strong euro has been good for anyone crossing the border into Northern Ireland, or indirectly via lower import costs, said Dan McLaughlin.

Most studies show that sterling is substantially undervalued against the euro, with 75p seen as around “fair” value.

“We have argued that sterling is likely to appreciate from recent lows against the single currency over time. The decline in the euro/sterling rate of late has seen it trade below 87p and although a short term euro rally is possible, we still feel that the 84 pence lows of last June are likely to be revisited by mid-year.”

The euro has also fallen against the dollar, although again the current level (around $1.39) is still substantially above the $1.15 – $1.20 range seen as fair value, he said.

The dollar’s appreciation, which has been broadly based, may in part be due to the relatively good performance of the US economy of late, with GDP in the final quarter of 2009 rising by 1.4%, compared with just 0.2% estimated in the euro area, he said. The perception that continental Europe is under-performing the US is also evident in longer term interest rates, with the yield on 10-year US bonds rising sharply relative to German bonds over the past two months.

“We believe that relative economic performance is a strong driver of currencies so, in the absence of an acceleration in euro growth relative to the US, the euro may remain under downward pressure against a resurgent US dollar. We have cut our forecast for end-March to $1.35 from $1.40,” he said.