Euro sets course for parity with dollar

The euro is expected to reach parity with the dollar later this week as fears grow over the health of the US economy, combined with profit warnings and the air of scandal that continues to dog US firms. The strengthening euro will in turn put pressure on Irish exporters, whose goods will be less competitive abroad as a result.

The dollar's fall against the euro prompted the International Monetary Fund to call on the US to tighten its budgets to prevent a further fall, which could threaten global recovery.

Yesterday the euro reached $0.98 for the first time in more than two years. The trend was greeted with dismay in European stock markets, as investors abandoned exporters instantly rendered less competitive by the rising single currency. European indices fell to nine-month lows, reflecting the dollar's slide against not only the euro, but also sterling, the yen and the Swiss franc.

Here analysts raised questions about the ability of the already-troubled Irish economy to maintain its course amid continued instability in the US.

"This is unambiguously negative," said Mr Austin Hughes, chief economist at IIB Bank, who questioned the dollar's ability to stem its slide during the traditionally quieter summer months.

Mr Hughes said that declining investor confidence in the US markets could, over the longer term, translate into diminishing inflows of foreign investment into the Irish economy.

"The equity markets are the lifeblood of investment. Without any incentive to invest, the Irish economy is going to be hit," he said.

The euro has gained 12 per cent against the dollar since the beginning of this year in a trend that owes little to the European economy and much to "Enronitis" backlash in the US, as trust in corporate governance falls to historical lows.

Mr Jim Power, chief economist at Friends First, believes some blame for dollar weakness should also be laid at the door of US policymakers, who he accuses of pandering to internal business interests ahead of mid-term elections later this year.

Tariffs on steel and measures favourable to agricultural producers in key election states are a source of worry, says Mr Power, who argues that US Treasury Secretary Mr Paul O'Neill may be engineering a weaker dollar "by stealth". "At a fundamental level, there has been for the last six months a gradual questioning of the US attitude to a strong dollar policy," he said. "It is now becoming evident to investors."

Mr Niall Dunne, financial markets economist with Ulster Bank, expects euro/dollar parity to be shortlived at this stage in the cycle, but predicted it would be restored within the next six to eight months and would then be sustainable or even surpassed. Parity would be, he added, "a fair exchange rate".

Euro gains, meanwhile, were positively viewed by the European Commission, where a spokesman for EU Monetary Affairs Commissioner Mr Pedro Solbes said that, while the rapid gains may need to be analysed, "the climb itself is welcome". Even if it manages to breach the psychological parity level in the short term, the euro will still be a full 17 per cent below its launch value of $1.17 against the dollar in January 1999.

Profit-taking later yesterday brought the euro back down to $0.976, still a shade above its $0.971 close in New York last Friday.