A sharp slide in the value of the euro on the international currency markets has raised fears of a rise in the rate of inflation later this year. The new currency is now worth less than $1.10, after a further fall yesterday left it 8 per cent lower against the US currency than when it was introduced just seven weeks ago.
The euro's continued weakness - it has fallen almost continuously since its launch - has led to fears that Irish consumers will be hit by rising prices in the shops, due to higher import prices for goods coming from outside the euro zone.
If the weakness of the euro is maintained, importers will soon start to pass on to the public the higher prices of goods imported from countries such as the US and Britain.
The euro's fall will also mean more expensive holidays for those travelling to the United States or Britain.
However, the drop in the euro's value is good news for Irish companies exporting outside the euro zone, giving them a competitive edge in markets such as the UK.
The selling of the new currency has been prompted by a weak economic performance in France and Germany, the main euro zone economies, compared with a strong US economy, according to the European Central Bank president, Mr Wim Duisenberg. Speaking late yesterday, he said he expected the main euro economies to recover later this year.
Much attention will now focus on the Federal Reserve Board chairman, Mr Alan Greenspan, who is due to address the Senate Banking Committee today. If Mr Greenspan, one of the world's senior central bankers, predicts further growth in the US economy, it could cause the euro to slide further.
Confidence in the US economy was shown by a sharp rise in US share prices last night, with the Dow Jones Industrial Average adding 2.3 per cent in value.
Speaking yesterday, Mr Duisen berg said political pressure to cut interest rates had also contributed to the euro's weakness. The German Finance Minister, Mr Oskar Lafontaine, has been particularly vocal, calling for rate cuts to boost the German economy, and yesterday he again welcomed the euro's fall.
The slide in the value of the single currency means the pound is now falling back towards the levels against sterling which provoked a sharp rise in the inflation rate last summer. Inflation peaked in August at 3.2 per cent, but averaged the year at 1.5 per cent.
If the euro's slide continues, inflation will once again be back on the agenda, Dr Dan McLaughlin, chief economist at ABN Amro warned.
Yesterday the pound dipped briefly below 86p against sterling, closing at 86.20p compared with 86.50p on Friday, and is likely to fall further, according to Dr McLaughlin. He warned that another fall in the euro to $1.05 would mean a rate of around 81.5p against sterling, a level which many businesses would be likely to pass on through increased prices. The pound began the year at 90p against sterling.
Last night the euro fell to $1.0992 from $1.1076 on Friday. Its performance translates to a fall in the value of the pound to $1.3957. The pound began the year at a high of $1.4994.