THE FED'S decision last night to cut interest rates by three-quarters of a percentage point to 2.25 per cent will accentuate the downward pressure on the US dollar, making life harder for Irish exporters to the US.

The dollar has dropped dramatically against the euro over the past year. In March 2007, the dollar was trading at $1.33 against the European currency. In Dublin yesterday, the dollar closed a shade below $1.58. Thus, over the past 12 months, the dollar has declined by 25 US cents against the euro.

As a result, the prices of Irish goods and services in the US are now 19 per cent higher than a year ago, purely as a result of exchange rate changes. Price increases on this scale will curb the demand for Irish-produced goods and services in US markets. Irish enterprises seeking to remain competitive in US markets by absorbing a part of the dollar's decline themselves will see their profit margins squeezed.

The cut in US interest rates yesterday will reduce the yields on dollar-denominated assets relative to those available elsewhere, driving investors out of the dollar in the process.

It is the latest in a series which has seen the key Federal Funds rate reduced from 5.25 per cent to 2.25 per cent since the subprime lending crisis broke last summer. But it is not necessarily the last in the series. US interest rates will be clipped further if economic conditions continue to deteriorate. Expectations of further rate cuts in the future will weigh on the dollar in the weeks ahead.

The dollar's fortunes on foreign exchanges have not been helped by the unbending position adopted by the European Central Bank (ECB). Since August, the ECB has kept its key interest rate fixed at 4.0 per cent in an effort to subdue rising inflation rates.