The euro's weakness against the dollar, which has dragged the pound to below 80p sterling, did not bode well for Irish inflation next year, economists said yesterday.

While the pound's weakness against sterling may be good news for exporters, putting them in a "super-competitive position", it makes life even tougher for importers, many of whom already operate in a highly competitive retail environment.

"It certainly ups the inflation temperature here," said Mr Austin Hughes, an economist with Irish Intercontinental Bank. "There is now a risk of inflation numbers of around 4 per cent next year, which is not a good background for wage talks."

The pound closed at 79p sterling yesterday as the euro ended at $1.0016. Although it regained a toehold above parity after falling to all-time lows of $0.9990 in Asian trading, it is not expected to make a significant recovery in the near term.

The healthy state of the US economy, allied to concerns about the German government's attitude to business in the wake of the rescue of the German construction group Philipp Holzmann and talk of a withholding tax, were prime factors behind the euro's weakness, analysts said.

Economists said the situation was also exacerbated by artificial market conditions, with liquidity drying up as year-end approached and as nervous investors, wary of the millennium bug, fled to the safe haven of the dollar.

Mr Jim Power, chief economist with Bank of Ireland Group Treasury, said that with investor sentiment toward the euro at rock bottom, he expected it to fall further next week.

"I would expect it to consolidate around parity over the next day or so but over the next week it will fall further, possibly as low as 98 cents."

Such a move would drag the pound even lower against sterling, to levels not seen in nearly 20 years. Mr Power believes that an exchange rate of 78p sterling could be on the cards, adding to the price pressures that already exist in the economy.

"The Irish economy is in for hot growth over the coming 12 months, what with the National Development Plan and the Budget," he said. "This will compound the inflationary impact of Wednesday's Budget."

Analysts said the only positive on the inflation front was the highly competitive nature of the retail market which might help keep prices down by making it difficult for retailers to pass on price increases.