The euro surged to a new four-year high of over $1.14 in New York late yesterday. The latest rise in the currency will intensify pressure on Irish exporters.
In Europe, the euro was at just below $1.1350 and at 70.26p sterling - its highest level against both currencies since 1999, the year of its launch. It closed at $1.1434 in New York. It's rise is adding to pressure on companies exporting to the UK and the US, the Republic's two largest export markets.
The recent bout of dollar weakness is related to investor concerns about the state of the US economy. Recent indicators have been weak, casting doubt on the hoped-for recovery. Investors have, in particular, been focusing on the US current account balance of payments deficit and worrying that the capital inflows which have funded the deficit in recent years may be in danger, unless the economy starts to improve.
Higher euro zone interest rates are also attracting investors to the euro. Euro base rates are at 2.5 per cent, compared to 1.25 per cent in the US. Economic analysts are divided on how far the euro can rise, though many feel it may soon exceed the level of $1.1747 at which it first traded on January 4th, 1999.
The rise in the euro puts pressure on companies exporting outside the euro zone. The Central Bank's trade weighted competitiveness indicator, designed to measure the average value of the euro weighted in terms of the currency exporters trade in, closed above 101 yesterday and is now steadily above 100 for the first time in recent years. Its current value is 9.8 per cent higher than one year ago and the consistent upward trend of recent months is highlighting the building pressure on Irish exporters.
The situation is now "pretty dire" for Irish exporters, warned Mr John Whelan, chief executive of the Irish Exporters' Association. The weak euro had helped to offset rising domestic costs in recent years, he said. However now the euro was rising steadily, leading many exporters to re-assess whether they could still hope to serve certain export markets profitably.
This currency pressure was added to by continuing domestic inflation, he said, which was limiting the ability of Irish industry to respond. Meanwhile most international markets are difficult - with Asia the latest to be hit, due to SARS. New regulations being introduced in the US to deal with bioterrorism, will also impose a further administrative burden on Irish food and drink exporters, Mr Whelan said,
The euro's rise is also leading to complaints from companies in other euro zone states. Firms as diverse as consumer products group Henkel AG and luxury car maker Audi, owned by Volkswagen, have warned about lower sales.
Volkswagen reports first quarter results today and analysts are braced for bad news, with a large part of the damage likely to be done by the strong euro.
The euro has rallied 8 per cent this year, on top of strong gains in 2002, and French Prime Minister Jean-Pierre Raffarin warned in a newspaper yesterday that euro/dollar developments could hinder his country's recovery.
But European Central Bank council member Ernst Welteke said that "in our opinion, this is not the case" when asked on Tuesday if the currency was dampening the euro zone economy.
In fact, analysts hope the ECB will be prompted by the strong currency to lower borrowing costs and boost domestic demand in the next few weeks, if not at its meeting on Thursday. A rising euro curbs import prices and will help the bank achieve its main goal of preserving price stability. - (additional reporting Reuters)
