Currency markets were always likely to spring some surprises during 1999 given the introduction of the euro, which effectively transformed the world's currency market into a three horse race between the dollar, yen and euro. Currencies such as sterling and the swiss franc continue as strong independent currencies, but their roles are secondary compared with the big three.
All of the professionals that are involved in the currency markets, from hedge fund speculators to corporate treasurers, have come to expect occasional sudden and sharp swings in currency cross rates. The past few weeks would seem to have witnessed just such a sharp swing in sentiment.
The persistent weakness in the euro during 1999 had led many analysts to predict its exchange rate would fall to parity versus the US dollar. However, in the space of a few days this prediction all but vanished as the euro gained ground against the US dollar jumping from a rate of 1.01 to a high of 1.07.
The catalysts for this sudden about-turn in the euro's fortunes are difficult to identify. Comments from Wim Duisenberg, the European central bank chief, that European interest rates could rise if inflation rose, undoubtedly had some positive impact. Some evidence from German business surveys that the German economy is picking up would also seem to have increased demand for the euro.
It is a little too early to make a definitive judgment as to whether the recent recovery in the euro's fortunes is a false dawn or whether it represents the beginning of a longer-term phase of euro strength.
However, this recent turnaround in the euro's fortunes probably does sound the death knell of talk that the euro could crumble to below parity against the US dollar.
From an Irish perspective, the recovery in the euro is unambiguously welcome. In the past a strengthening Irish pound would have led to fears of a loss of competitiveness. However, in the current climate of economic boom, a strengthening currency is a very welcome antidote to the rapidly overheating Irish economy and associated worries about a pick up in inflation.
From an investment perspective, if the euro has now entered a period of strength, it is an argument for investing primarily in euro-denominated assets where there is no currency risk. Institutional investors will concentrate their attention on euro-denominated equities in continental Europe.
Private investors will also turn their attention to European equities and the strong demand from Irish private investors in the recent Deutsche Telekom secondary offering highlights how sophisticated Irish investors have now become.
While Irish private investors will continue to diversify into Europe, they are also likely to invest in their home market. In fact when comparisons are made with the current valuations on the Irish market with those on the European markets, there is a strong case for investing in Irish equities. With the notable exceptions of Telecom and CRH, the bulk of Irish shares are now trading on price-earnings ratios that are significantly below their international peers.
While the trend towards diversification will act to sway investors towards European equities, the good value currently available on the Irish market should over time attract a substantial portion of Irish investors funds.