Euro gains on dollar over war fears

Growing concerns about US economic policy and heightened prospects of a war in Iraq lifted the euro to a three-month high against the dollar yesterday.

The euro rose to $1.0259 in early trading before tailing off to close at $1.0221. Analysts said the gains should be sustained over quieter pre-Christmas trading, with some predicting that the euro could rise as high as its launch level of $1.17 in 2003.

A weaker dollar will make the Irish export market less competitive and will be particularly damaging when accompanied by rising domestic inflation.

Irish exporters are also likely to suffer as sterling mimics the dollar in its decline. The euro raced to five-month highs against sterling for a second day yesterday before closing at 64.45p.

Mr Alan McQuaid, chief economist with Bloxham Stockbrokers described sterling as a "dollar clone". Mr McQuaid is expecting the euro to rise to $1.10 next year, but does not rule out a jump to $1.17. He believes the new Bush economic team will push for a weaker dollar to boost trade in heartland Republican industrial areas over coming months.

AIB chief economist, Mr John Beggs, agreed, noting that while traders were still uncertain of the views of incumbent US Treasury Secretary, Mr John Snow, it was likely his industry background would push him towards a weaker dollar policy.

Mr Aziz McMahon, foreign exchange analyst with ABN Amro in London, said this week's fall in the US currency might have been prompted by wary investors seeking to hedge long US holdings by selling off dollars.

He said that if the euro breached the technical ceiling of $1.026 next week, a rise to $1.05 could follow quickly. If the ceiling is not broken, the euro is likely to fall back, according to Mr McMahon, who believes that a decline to $0.98 could be possible early next year. The low volumes traditionally recorded over the holiday period allowed for erratic currency movements, he added.