The euro continued to hit fresh lows against the dollar and sterling yesterday, raising new fears about the Government's forecast that spiralling inflation is nearing a peak.
There was no end in sight yesterday to the pressure on the beleaguered euro as investors continued to sell despite the prospect of further interest rate rises by the European Central Bank, possibly as early as tomorrow.
Economists warned that the ongoing decline could further fuel Irish inflation, possibly undermining the value of wage rises agreed as part of the new national agreement.
The fall to a record $0.9251 as markets reopened after a four-day Easter break was not prompted by any specific news, and analysts believe the currency could fall as low as 88 cents over the coming weeks.
At the close of trading in Europe, the euro stood at $0.9262 from $0.9382 before the Easter weekend and at 58.75p against sterling from 59.41p. As a result, the pound fell to 74.53p from 75.37p, coming close to its all-time low of 73.34p on February 16th 1981. In US trading, the euro fell to $0.9167 before recovering to close at $0.9205.
Billions of euros were sold as investors who had been holding on to large amounts of the currency liquidated their positions, giving up on the idea that a rally was around the corner. Investors are now convinced the European Central Bank will be unable to stem the currency's slide, even if it raises interest rates when its council meets tomorrow.
According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, the currency is suffering from a major credibility problem. "Ever since the euro was launched, every reason to sell it has been acted on but every time a reason has been given to buy it, it has been ignored.
"It does not matter that the ECB says to look at the fundamentals and the currency should appreciate; buying it has lost people money every time."
Some analysts said a rate rise of half a percentage point tomorrow could boost the euro. However, this is unlikely as it could also be seen as a reaction to the state of the currency and would encourage investors to sell more furiously.
The markets are also focusing on the far more rapid growth in the United States than in Europe. Data being released tomorrow are expected to confirm that, year on year, the US economy grew by 6 per cent in the first three months of the year. Growth in Europe will only be half that. In addition, interest rates are 6 per cent in the United States, offering a larger return than 3.5 per cent in Europe.
Investors have also almost given up hope that a tumble in US stock markets will boost the euro. On Monday the technology-laden Nasdaq fell by 4 per cent but the dollar held its ground.
According to Mr Hunt, the ECB needs to begin talking with one voice and to highlight the positive message about ongoing recovery in the euro zone.
The weakness of the currency has already begun to feed through to Irish inflation figures. "If it persists at these level, it could mean that inflation would be as much as one percentage point higher than forecast," Mr Hunt warned. That could mean price rises would remain at the current level of 4.6 per cent, which would put pressure on the terms of the recent Programme for Prosperity and Fairness.