The Republic's inflation spiral is set to intensify as the beleaguered euro faces renewed pressure this week in the absence of co-ordinated action to boost its value by the European Central Bank and its US and Japanese counterparts.
The likely continued decline in the euro combined with rising oil prices - back at the highest level in a decade - could also prompt the ECB to increase interest rates again, despite the risk of damaging economic growth across the euro zone. At least one more rate rise is already expected before the end of the year.
The euro, which dropped to a new low of $0.8534 in late trade in New York on Friday night, has lost 25 per cent against the dollar since its inception in January 1999, and about 15 per cent this year, despite two percentage points in rate increases in the last 12 months.
Mr Jim Power, chief economist at Bank of Ireland, warned that unless the ECB persuades the US Federal Reserve and the Bank of Japan to join it in buying euros, the currency will head down towards 80 cents this week and next. This will put further pressure on Irish inflation as the costs of imported goods rises.
The ECB is spending €2.5 billion buying the currency but to little avail, other than making traders nervous about possible future co-ordinated intervention.
In an interview with the French Les Echos daily released ahead of publication today, ECB vice-president Mr Christian Noyer said the level of the euro would likely come up in discussions at the G7 meeting of leading industrial nations on Saturday.
"The European position is clear: the euro is dangerously undervalued. That should be confirmed at the G7, I'm convinced of it," Mr Noyer said.
He also predicted that a reversal was going to take place and added: "Given recent developments, it even risks being abrupt."
However, the euro is also likely to come under further pressure if Danish polls continue to predict a No vote in the upcoming referendum on joining the single currency. According to Mr John Beggs, chief economist at AIB, the markets are likely to start factoring a possible negative vote into the value of the euro before polling day.
Danes planning to vote No to membership of the European currency held a steady lead over those opting for Yes in two opinion polls published yesterday. However there are still large numbers of undecided voters.
The referendum is on September 28th. Analysts say a rejection by the Danes of the euro could act as a fresh sell signal and further weaken the currency as that would also make it less likely that Sweden and the UK would join.
A Gallup opinion poll published in the daily newspaper Berlingske Tidende gave euro opponents a six-point lead, by 44 to 38 per cent. This is the biggest difference between the two camps measured by Gallup since its first daily poll was released on September 3rd. The weakness of the euro is widely regarded as the main reason for a turnaround in Danish voter sentiment to a clear advantage for the No side from a narrow but consistent Yes lead.
The weak euro and higher oil prices may also lead to further interest rate rises. ECB board member Ms Sirkka Hamalainen warned on Friday that the ECB will be vigilant about whether oil costs - now at the highest level in a decade - and the weak euro will fuel inflation further.
"We shall continue to monitor the situation closely in order to be able to react promptly should new information change our assessment of the risks to price stability in the medium term," she said. The ECB left its official interest rate at 4.5 per cent last week.
