The decline of the euro seems to just go on and on. The currency hit another low of 84.47 US cents yesterday and few analysts believe a recovery is imminent. Some predict that it could fall as low as 80 cents over the coming weeks.
The European Central Bank is in an unenviable position. A series of interest rate rises have failed to stop the euro's decline. Indeed some investors are concerned that higher interest could hinder European economic growth and this has been blamed for some recent selling of the currency.
Direct intervention - where the ECB steps into the market to buy euros and drives the price higher - may now be the only short-term solution open to the bank. However, it dipped its toes into the market last week, without any immediate success
The euro's weakness will be discussed at this weekend's meeting of the Group of Seven industrialised nations in Prague. If that meeting decides to co-ordinate substantial intervention - with the ECB supported by the US Federal Reserve Board and the Bank of Japan - it is possible the euro could be pushed higher. However this appears unlikely. The US Treasury secretary, Mr Larry Summers, said only last week that the Clinton administration had no problem with a strong US dollar.
European policymakers repeatedly insist that the euro is undervalued, but the market ignores them and continues to view every piece of news from Europe as negative for the currency. Investors remain convinced that the US economy will continue to perform more strongly than Europe's and are therefore buying dollars.
There are also concerns that the Danes will vote against euro membership on September 28th, while doubts remain about the pace of recovery in the euro zone, where Ireland's strong growth rate is very much the exception.
The euro's decline is particularly unwelcome from an Irish viewpoint. The exposure of the Republic to the weak currency is much greater than that of the main euro zone economies, as exports and imports constitute a much greater part of our economic output and we trade relatively heavily with non euro zone countries, such as Britain and the US. And the price of one significant import - oil - continues to rise, with crude prices hitting fresh 10-year highs yesterday. In response, EU transport ministers have agreed to set up a forum to examine the impact on hauliers.
Higher import prices due to the falling euro will add to inflationary pressures, at a time when the Government is coming under pressure to renegotiate the pay terms in the Partnership for Prosperity and Fairness. The main trade unions are demanding extra pay increases, on top of those agreed in the PPF. Inflation is already running at 6.2 per cent and is set to accelerate further. The danger now is that an inflationary psychology could become ingrained in the economy, with a detrimental impact on long-term competitiveness.
The Irish economy needs the euro to gradually strengthen in the months ahead. This would reduce inflationary pressures and help to cool the rate of economic growth. Unfortunately, there is little that the ECB can do to boost the currency in the short term. It will probably nudge up interest rates later this year, but - as we have seen - this may not support the currency. EU governments can support the currency in the longer term by concentrating on economic reforms to allow Europe to take advantage of productivity growth. There are signs that growth in Europe is reviving, although a weak survey of German business confidence produced yesterday shows that growth is still patchy. Sooner of later the euro will turn the corner. The question is when?