The euro is likely to come under further pressure on the markets this morning following the European Central Bank's decision not to cut interest rates.
Following the announcement, the euro fell again. It was trading at around $1.0813 in late trading from $1.0930 a day earlier and at 67.18p against sterling from 67.60p. The pound fell to 85.30p against sterling as a result.
The president of the ECB, Mr Wim Duisenberg, insisted interest rates were at historically low levels and were also very low in comparison with other countries. However, he admitted that different parts of the euro zone economy were "diverging" which was making it more difficult to reach a euro-wide view of monetary policy.
Yesterday evening, Irish economists were critical of the ECB inaction. According to Mr Jim Power, chief economist at Bank of Ireland group treasury, the markets were concerned about the divergence and the slowdown in German and Italian growth.
"The ECB is making the same mistake the Japanese did in the 1980s. Taxes need to be cut and the ECB should cut rates to 2.5 per cent if not 2 per cent," he insisted. "The only threat at the moment is deflation." He said the ECB was still harping on about inflation but it was yesterday's battle.
He predicted that the euro was now set to fall to $1.05 which would mean the pound falling towards 82p against sterling: "We could even be talking about parity (with the US dollar) in a month or two," he said.
AIB economist Mr Oliver Mangan said: "The speculation is that we will have a rate rise in the US, so given the ECB's lack of concern, the euro could weaken further."
According to Mr Duisenberg, however, the main reason for euro weakness was the strength of the dollar and the differential in interest rates between the US and Europe.
"The level of the euro is more or less in line with the deutschmark last year. The strength at which it opened in January is more the exception than the rule."
He said the ECB was investigating whether the strong growth in credit in the euro area had been used to buy dollar assets, which would help explain the decline in the euro. Mr Mangan said the ECB may be hoping that allowing the currency to weaken would give exporters a boost.
But, he added, this could cause inflationary problems in Ireland.
"Unfortunately, we are the one country which still does most of our trade with countries outside the euro zone," he noted.
"Substantial amounts of our imports come from the US and the UK and their prices will be driven up, adding to inflationary pressures."
Mr Duisenberg said last night that he could see no sign of inflation in Ireland and pointed out that it remained below 2 per cent. The world economy was no longer so uncertain, he said, and there were signs of improvements in the real economies in Asia.
