The euro has climbed back to the level of its 1999 launch against the US dollar, hitting prospects for growth and exports in the Irish economy this year, writes Cliff Taylor Economics Editor
The dollar's decline led to sharp falls in European stock markets, due to fears of the impact of currency moves on economic growth across the euro zone. The ISEQ index fell 2.3 per cent, and all other European markets also lost heavily. The weak dollar and fears about US growth also hit Wall Street, which closed down 2.5 per cent last night.
Market forecasters now believe the euro's ascent will continue, with a growing belief that the Bush administration has abandoned support of a strong dollar and is happy to see the currency weakening.
A statement from the White House late yesterday that the strong dollar policy had not changed did little to convince the markets, which instead concentrated on weekend comments from the US Treasury Secretary, Mr John Snow, who appeared relaxed about the dollar's fall.
The euro topped $1.17 at one stage - the level at which it launched on the markets in January 1999 - before closing in European markets at $1.1682. It later traded in New York at €1.1647.
The dollar's fall '- it has lost 11 per cent against the euro this year - will hit Irish companies exporting outside the euro zone, particularly those selling to the US and UK markets.
Central Bank figures show that the average euro exchange rate faced by Irish companies exporting outside the euro zone rose by 10 per cent over the past year. Because few companies will be able to increase the prices they charge on overseas markets this translates into lower profits and could lead to increased redundancies in the months ahead.
Slowing exports will also depress overall growth further, at a time when the economy is already sluggish. However, it will help to bring down the rate of inflation by lowering the cost of imports from outside the euro zone.
The dollar suffered from an early sell-off as investors digested the weekend comments from Mr Snow. Speaking to reporters after a meeting of G7 finance ministers, he referred to the dollar's recent fall as "fairly modest".
While this fuelled the belief that the strong dollar policy had changed, Mr Ari Fleischer, the White House spokesman, later told reporters: "The dollar policy is unchanged. The government supports a strong dollar."
However, this had little impact on the markets, with investors believing the administration was content to see a weaker currency to help US exporters and boost the stock market by increasing the dollar value of the overseas earnings of US corporates.
Most forecasters now believe that the euro will rise further. Mr John Beggs, chief economist at AIB, said the euro could rise by another 10 cents against the US currency before international central banks would intervene to try to stem the dollar's fall.
The markets now believed that US policy had changed and also noted European policymakers' comments welcoming the revival of the euro, according to Mr Chris Johns, chief strategist at ABN Amro in London.
"When foreign exchange markets see an open goal, they don't need much of an invitation," he added, forecasting further dollar weakness, with the obvious dangers to European growth the only factor which might limit the US currency's decline.
Soft dollar seen as US policy: page 18