The euro has fallen to record lows against the dollar and the pound is below 77p against sterling, as investors continue to bet on the US economy and worry about old-style labour practices in Europe.
The fall in the value of the single currency is bad news for Irish businesses importing goods from Britain and for the ongoing outlook for inflation. But it will continue to boost the competitiveness of exports and underpin the economic recoveries in Germany and France.
Bank of England governor Mr Eddie George said that the decision to join the euro had contributed to "an extremely overheated housing market" in the Republic. He said it was "premature" to draw any lessons for the UK from the Irish experience, but "what will be interesting is just how inflationary the situation turns out to be". The euro dropped quickly yesterday afternoon and was trading below 99 US cents in late European trading. The faster the currency dropped, the more momentum trading took over.
An apparent lack of any official concern about the euro's weakness accelerated its decline, with dealers pointing out that no politician or European Central Bank (ECB) official appears willing to accept responsibility.
The ECB does not have an exchange rate target for the euro but some economists think it is more concerned about the currency's prolonged weakness than has been acknowledged in public statements. An unexpectedly large rise in German import prices this week gave the first hints that the euro's slide may be stoking inflationary pressures in the euro zone.
The US authorities are also thought to be uncomfortable about the euro's weakness, which is contributing to the US's ballooning trade deficit. US Treasury Secretary Mr Larry Summers is widely thought to have pushed for a statement on the currency's decline in last weekend's G7 communique.
According to Dr Dan McLaughlin, chief economist at ABN Amro, further demands from German unions also underlined the structural problems which have still to be tackled in some European economies, despite the positive turnaround in their fortunes.
He added that a lot of long-term players or fund mangers had bought more euros than they would wish, having bought into the euro recovery story and, as a result, were net sellers.
Yesterday, news that orders for US manufactured goods shot up an unexpected 4.1 per cent in December, its strongest rate in five months, sparked the dollar buying spree.
Federal Reserve chairman Mr Alan Greenspan's remarks late on Wednesday that low inflation was key to sustained economic expansion bolstered the market view that the Fed would raise rates by at least a quarter of a percentage point when it meets on February 1st and 2nd.
The euro's new lows translate to about DM1.9724, the dollar's highest point in more than 10 years. Against sterling, the euro fell below 60.60p.
Opinion is divided on whether the euro's decline increases the chances of a rise in interest rates.
