The euro was hovering never its lifetime lows against the US dollar last night, trading just above $1, having briefly dropped below parity earlier in the day. European stock markets had earlier closed sharply lower, although the US market had stabilised by its close late yesterday, adding to pressure on the single currency.
European stock markets closed down yesterday after a feeble rebound by Wall Street from Monday losses failed to restore confidence while a fluctuating euro fell briefly below dollar parity.
In Dublin, the ISEQ index of Irish shares closed down 4818.71, down 76.56 (or 1.56 per cent) with the main falls coming in the financial stocks.
London's FTSE 100 blue chip index closed down 105.7 points or 1.7 per cent at a 12-week closing low. France's CAC closed down 1.64 per cent while Germany's DAX fell 1.77 per cent
The interest rate fears were sparked by comments late on Monday from two voting members of the Fed's rate-setting committee.
Federal Reserve Bank of Atlanta president Mr Jack Guynn said he did not see many signs that the Fed's three interest rate rises in 1999 were slowing consumer demand. His colleague from San Francisco, Mr Robert Parry, said the Fed had so far taken a "cautious approach" in reacting to inflation.
Wall Street dived on the comments on Monday, with the Dow Jones industrial average ending 2.16 per cent lower and the technology-heavy Nasdaq recording its fourth largest drop in history of 3.29 per cent. By late yesterday the Dow had regained some ground, closing 21,72 points higher at 11,029.89.
The recovery on Wall Street led to some renewed pressure on the euro - the sale of US shares the previous day had briefly given support to the single currency, but this evaporated yesterday. The euro traded as low as 99.88 cents at one stage, just above its all-time low of 99.86 reached on December 6th of last year. In late trading in New York last night it was quoted at $1.0010 to $1.0015.
Economists in Dublin said they saw little respite for the beleaguered currency or for the sterling/Irish pound exchange rate which sank to a low of 77.10 pence yesterday in sympathy. If the pound remains this weak against sterling hen it will fuel domestic inflationary fears.
"I would expect the euro to remain around these levels and sterling to make further gains in the days ahead," said Mr Aziz McMahon, economist with Ulster Bank Group Treasury.
Mr McMahon believes the Irish pound could be as low as 75 pence against sterling by the end of the first quarter of this year and possibly lower by mid-year.
Meanwhile, the jury is out on whether the recent euro weakness will prompt the European Central Bank (ECB) to bring forward the rate rise that most economists had been predicting for the end of March or April.
The ECB is likely to be concerned about the affect of oil prices, which are denominated internationally in dollars, on inflation.
Mr McMahon says he had been anticipating an interest rate rise in March/April but there was now a possibility the bank could move to increase rates as early as next week's council meeting.
But Mr Pat O'Sullivan, treasury economist at AIB, believes the central bank will hold off as it suits them to maintain a stimulatory monetary environment until there is concrete evidence that the nascent economic recovery in Europe is built on firm foundations.
