THE pound has fallen below parity against sterling while reaching fresh highs against other European currencies, prompting calls for action from exporters.
The pound closed at 99.88p against sterling yesterday from 100.04p on Friday and at 2.5952 marks from 2.5846.
On an overall trade weighted basis the pound has now appreciated over 2.5 per cent against all other currencies since the end of September, suggesting a similar decline in our competitiveness. However, exporters to Britain are gaining, with the pound below parity with sterling for the first time since March 1995.
Exporters to Germany and France have been hit far harder - the pound has appreciated by over 6.5 per cent against the mark over the same time.
"This is the time to rent your gite in France for the summer," Dr McLaughlin said. It also makes skiing holidays in Austria and France far more affordable.
The pound is now 7.5 per cent above the central rate - until recently the Central Bank appeared to be attempting to keep within the old 2.25 per cent limit. The maximum which it is allowed to go is 15 per cent under new rules introduced after the devaluation in 1993.
Consistent Central Bank intervention in the foreign exchange markets over the last week helped to keep the pound at parity with sterling while climbing against other currencies in the ERM grid.
Even the threat of intervention has put an effective floor under the currency. However, the authorities are believed to be uncomfortable with a rate above 2.60 marks.
"If sterling keeps appreciating I believe we will see the pound falling," warned Mr Jim Power, chief economist at Bank of Ireland.
Dr Dan McLaughlin, chief economist at Riada Stockbrokers said the Bank would have to spend a lot of money to keep us at parity if sterling moved to 2.60 marks or above. "Most people simply would not want to buy the pound at that level," he said.
A rate above DM2.60 might also call into question the pound's credibility within the ERM. Under Maastricht convergence criteria the currency is meant to be stable in the two years leading up to the single currency.
According to the Irish Exporters Association job losses, lost markets, eroded profits and even factory closures could result from the strengthening of the pound over the last month.
While exporters also condemned the pound rise against sterling to 104p earlier this year they are bore concerned this time around as the move has been sudden. "Exporters are expressing alarm rather than concern," IEA chief executive Mr Colum MacDonnell said. "Since the start of the year we have see the pound rise by some 12 per cent against the mark and the French franc and these markets account for 25 per cent of our exports. And as we export much more than we import from all mainland European countries, we are not offsetting benefits to the same extent as with a strong sterling where our exports and imports are balanced."
The IEA has called for the authorities to maintain their old target of tracking the mark. But Mr Power warned that selling the pound to keep within the old 2.25 per cent band would mean a depreciation to 93p or less against sterling. "That would clearly have inflationary implications," he said. One option would be for the bank to set out a trade weighted target similar to New Zealand, Mr Power said.
In the meantime, he added, sterling was likely to rise to 2.60 marks and could go as high as 2.65 marks or even 2.70. "That will keep the pound under upward pressure against the mark," he said.
However, in the very short term, there could be some selling of sterling as investors take profits, according to Dr McLaughlin. "Sterling may drift back by the end of the week" he said.
