The euro's recent surge against the dollar and sterling is causing more headaches for Irish companies grappling to retain competitiveness in difficult times, economists have warned.
The euro is trading today at around $1.14 and £0.71, a rise of 30 per cent and 15 per cent against the respective currencies in the last twelve months.
According to Mr Robbie Kelleher of Davy Stockbrokers, the euro trading at these levels will seriously compound the problems, such as rising wage costs, already facing the traded sectors in Ireland.
Mr Kelleher added that these sectors were showing signs of significant weakness as early as the latter months of 2002 and the early months of 2003.
Mr Kelleher pointed out that for the Irish economy, the euro's current rally is the equivalent of an appreciation from 1.09 to 1.45 in the old $/IEP exchange rate and an appreciation from 78p to almost 90p in the old GBP/ IEP exchange rate.
Today's run against the dollar followed cautious comments from the Federal Reserve which signaled a growing concern about the threat of deflation to the US economy. Deflation is a fall in asset prices leading to a fall in demand and is notoriously difficult to eradicate by conventional economic policies, as shown in Japan.
Economists, and most notably the Central Bank, have been warning for some time the weak euro has masked the damage done by the rising costs of running a business in Ireland. The inevitable consequence of a strong euro in tandem with a price level higher than our trading partners will be lengthening dole queues.
The euro slumped from $1.18 at its introduction in January 1999 to its all-time low of $0.82 in October 2000. In recent months, as the United States has cut interest rates to spur growth and amid global uncertainty due to the war in Iraq, the euro has surged to hit its highest level against the dollar since February 1999.
ECB officials insisted the rising euro was "not a cause for concern at this time". But fears it may further depress already weak activity deepened yesterday from a batch of surveys which showed the dominant European services sector shrinking for the third month running.