The pound is expected to come under renewed pressure on the currency markets this week, with analysts predicting further slides against sterling and the deutschmark.
The Irish currency has been trading at eight year lows against sterling, closing last week at 86.5p, with some economists suggesting it could quickly fall as low at 85p if selling pressures emerge. Meanwhile the pound has also drifted down against the deutschmark, last trading at DM2.5637 and is expected to continue to struggle to gain ground in the days ahead.
Over the holiday period there was some selling of the Irish pound, with such activity in the relatively thin markets, exaggerating the actual price movements. But as full trading resumes today there are concerns of a possible sell-off by investors who believe the Government won't revalue the pound in the run-up to European Monetary Union, which will keep the pound under pressure.
Dr Dan McLaughlin of Riada Stockbrokers has warned that the pound could slip to lows of around 85p in response to international selling pressure this week. While Bank of Ireland economist, Mr Jim Power, believes the pound could hold out at around current levels of 86p sterling and DM2.55 for the time being at least.
Sterling has been supported by news of stronger-than-expected consumer lending figures, with recent figures showing strong retail activity during the Christmas shopping season. Stronger sterling also reflects expectations of one or two further rounds of interest rate increases of around a quarter of 1 per cent. The dollar also remains strong internationally, with the pound currently trading at its lowest levels against the US currency some years. The dollar's fortunes have been largely boosted by the uncertainties in the Far East.
It is still being seen as a safe haven when much of Asia remains engulfed by financial turmoil and at a time when Europe's economic recovery has not yet fully filtered through into hard statistics.
The strength of the dollar has also been helped by the lack of intervention from the Bank of Japan.
Meanwhile, US Federal Reserve Chairman, Mr Alan Greenspan has warned of dangers if the US economy should enter a period of falling prices.
In his most detailed statement yet on the potential for deflation, Mr Greenspan said a debate on the issue was hampered by faulty price measures and lacked clarity. "Some observers have begun to question whether deflation is now a possibility," he told the annual meeting of the American Economic Association (AEA).
"Even if deflation is not considered a significant near-term risk for the economy, the increasing discussion of it could be clearer in defining the circumstance," he added.
Deflation has not occurred in the United States on a broad scale since the Great Depression of the 1930s. Mr Greenspan declined to say whether there was an imminent risk of a deflationary cycle, but said it could be at least as bad for the economy as inflation.
"Both rapid or variable inflation and deflation can lead to a state of fear and uncertainty that is associated with significant increases in risk premiums and corresponding shortfalls in economic activity," he said.
Asia's financial crisis has put a spotlight on deflation as producers in the battered region are expected to unload a glut of cheapened goods, bringing down global prices.
Before the Asian troubles mounted, Fed policymakers were leaning in favour of higher interest rates because of worries that the nation's tight labour market would generate wage pressures that could feed inflation.
