EXCHANGE RATES:THE DOLLAR recovered against the Swiss franc yesterday after the Swiss National Bank said it would expand measures to stem the franc's rally.
The greenback had tumbled to a record low against the Swiss currency on Tuesday after the US Federal Reserve said it would freeze interest rates for the next two years.
However, the Swiss franc retreated 1.3 per cent versus the dollar yesterday.
The euro dropped more than 1 per cent against the US currency as speculation grew that France could be the next AAA-rated economy to face a downgrade. The single currency slid to a session low of $1.416.
Since 2008 the euro has been trading against the dollar in a range of $1.20 to $1.50.
Though low interest rates tend to exert a downward pressure on currency values, NCB chief economist Brian Devine said the US Federal Reserve’s decision to keep short-term interest rates at historic lows until 2013 does not mean the dollar will remain “extremely weak” for the next two years. He doesn’t believe the euro is strong enough to move too far above the $1.50 range ceiling.
Furthermore the “flight to the dollar” evident when markets become “really worried” in 2008 and 2010 will continue, he predicted.
“We’re still seeing huge inflows to the US Treasury market,” he said. Despite the downgrade of the US economy last Friday by Standard Poor’s, treasuries are still viewed as a safe haven, he said.
Treasuries gained yesterday after $24 billion in 10-year securities drew a record low yield in the first offering of the maturity following the SP downgrade.
The notes drew a yield of 2.140 per cent, below the previous record of 2.419 per cent in January 2009.
Currency exchange rates are expected to remain volatile while market nervousness persists, and John Whelan, chief executive of the Irish Exporters’ Association, says this volatility is the most pressing euro-dollar exchange-rate concern for Irish exporters.
Though a weak dollar has the effect of making Irish exports to their largest market, the US, less competitive, exporters can “mitigate against the worst of the exchange rate issues” with the correct hedging mechanisms, Mr Whelan said.
A weaker dollar can have certain side benefits for Irish businesses, such as lower oil prices, as the price of oil is denominated in dollars.
Also, many of the multinationals exporting from Ireland are US corporations and therefore enjoy a greater gain when repatriating their euro-denominated profits if the dollar has fallen in value.
However, rapid exchange rate fluctuation is making it very difficult for Irish companies to price their exports correctly. “You don’t want to overprice . . . but you also don’t want to lose out on bottom line margin by underpricing,” he said.
Mr Whelan believes that unless the euro zone and US economies fully “buy into” the need to adopt a much more robust process for handling their budget deficits, then exchange rate volatility will remain very high.
“The sticking plaster approaches taken by both economies haven’t really been accepted by the markets and that’s unfortunately what’s driving a lot of volatility,” he said.– (Additional reporting Reuters, Bloomberg)
