US interest rates are set to increase following news that inflation there has begun accelerating. The news did little to bolster the value of the euro which also failed to benefit from falling US stock markets.
Rising consumer price inflation led to fears that the US Federal Reserve could raise rates by more than expected and possibly quicker than expected. That prospect sent share prices tumbling.
However, according to economists here, the Fed is unlikely to raise rates by more than the market has been anticipating as that would risk a free fall in share prices.
According to Mr Jim Power, chief economist at Bank of Ireland, there will not be a rate rise before the next meeting on May 16th and that will be a quarter point.
Mr Pat O'Sullivan, economist at AIB agreed. "Raising rates by more than that would damage the assets markets and consumer confidence which the Fed would not want to risk particularly in an election year," he pointed out.
However, according to Mr Aziz MacMahon, economist at Ulster Bank, the sharp rise in US inflation to 3.7 per cent at the end of March, raises the prospect that the Fed will raise rates possibly as early as next week and by as much as half a percentage point.
Consumer prices excluding energy and food rose in March at the fastest rate in more than five years and factory production also increased.
"We're definitely over-heating" - leading to speculation the Fed will raise rates as much as a half-percentage point - said Mr Russ LaScala, manager of spot trading at Citibank in New York. The past five upward moves since last June have been quarter point increases. The fear is that the Fed could risk inflationary pressure building further if it does not make a more significant move. Mr MacMahon added that while inflation was low the Fed could afford to keep some support under equity markets with low interest rates. But if the choice comes down to inflation or the markets, the Fed will have to pick inflation, he said.
Despite an initial jump the euro failed to benefit from the equity sell-off. There is really very little that will persuade investors to buy the euro, Mr MacMahon noted.
The euro closed at $0.9547, having risen as high as $0.9620 following the inflation news, and at 60.60p against sterling from 60.12p a day earlier.
Traders are now waiting for news out of the G7 meeting in Washington this weekend. However, any decision to co-ordinate intervention in the currency markets is extremely unlikely, particularly as a weaker dollar would not benefit the US as it could add to inflationary pressures in the economy.
But a statement on the strength of the yen and weakness of the euro is still possible. The G7 members are meeting to discuss currency markets, the global economy and member nations' policies. They are expected to issue a communique this evening.
ECB president Mr Wim Duisenberg said on Thursday that the euro will be one of the topics at the G-7 session.
