The falling euro was one of the main financial themes of 2000. Will the revival of the currency be a feature of this year? Certainly, the euro has made an encouraging start to the New Year, rising to a six-month high of over 94 cents against the US dollar. Doubts about the performance of the US economy have led to a fall in the dollar's value over the past few weeks and generated considerable nervousness in the US stockmarket. The euro has benefited and forecasters are generally optimistic about the outlook for the currency this year. A revival in the euro's fortunes is long overdue, after a fall of 30 per cent in its value against the dollar between its launch date in January 1999 and its low point last October. Most forecasters now believe that the euro zone economy will grow more quickly than the US this year and this has supported the European currency. Some even fear that the US economy may be heading for a sharp slowdown in growth - or even a recession. These fears may be unfounded but they have been enough to spur a move out of the dollar and the nervous turbulence in US share prices.
It is tempting to conclude that the result of a US slowdown and euro zone growth will be a steady revival in the euro's fortunes in the months ahead. And this may well be the case. But experience suggests that currency forecasting is a difficult business. The worst may well be over for the euro, but any sustained signs of faltering growth in Europe could limit its strength.
Also, huge sums of international money have flowed into US financial assets and businesses in recent years, spurred by a belief that the US economy could consistently outperform the other major trading blocs. Doubts linger amongst the investment community about the long-term growth potential of the euro zone, and particularly the ability of the big French and German economies to consistently boost productivity and growth as the US has in recent years. From the point of view of the Irish economy, a gradual recovery of the euro would be welcome. By taking pressure off import prices, it would help to ease the rate of inflation. If the currency was to rise too rapidly, it might cause difficulties for Irish exporters to markets outside the euro zone, particularly if combined with sharply higher wage costs. However, business should be able to cope quite comfortably with a rise to somewhat above parity with the US dollar.
The euro is one of the key external influences on Irish inflation; the other is the price of oil. Here the signs are also reasonably encouraging. Brent crude oil prices have fallen from a high of $35 last October to $24 yesterday. Big OPEC members led by Saudi Arabia are now calling for production cutbacks to stabilise prices around $25 per barrel.
So 2001 starts with reasonably favourable trends in international markets from Ireland's viewpoint. The one concern is a sharp reversal in the US stockmarket, which could contribute to a sharp US economic slowdown. The economy here would benefit from a gradual US slowdown accompanied by a similar decline in the dollar's value against the euro. But it is too early to say for sure that this is what will happen.