Just two months ago, the euro was languishing in the currency markets, trading at around 88 US cents. By yesterday, however, its value had climbed to around 98 cents and currency forecasters predict that the euro could shortly breach parity. It appears that the dollar's bull run is well and truly over, with important implications for the global economic outlook.
The dollar's recent decline has been attributed to a number of factors. There are fears about the outlook for US economic growth and thus for corporate earnings, while Wall Street itself is going through something of a crisis of confidence, centred around the role of brokers and financial institutions in advising on share values, while cashing in at every turn. The latest financial crisis in Brazil - again seen at risk of debt default - is also weighing on the US currency.
All these factors have contributed to that most unpredictable of market events, a change in sentiment. Now everyone is looking for reasons to sell the US currency and even intervention in the markets yesterday by the Bank of Japan failed to halt the rise of the yen against the dollar. Share markets have also taken fright, with heavy falls in Europe yesterday because a falling dollar hits the prospects for EU exporters, although Wall Street took on a more stable tone later.
The difficulty with the dollar's decline is that it is happening so quickly. If it continues, this may cause difficulties for the US in attracting inward investment to its financial markets; it needs the money from this investment to compensate for a deficit of the current account of its balance of payments. That said, the longer-term outlook for the US economy remains strong and the lower dollar will help its exporters.
What of the implications for the Irish economy? The main danger is that a sharp rise in the euro will damage the competitiveness of exporters, acting as a further brake on an already slowing economy. So far the rise of the euro has been limited enough - it has gained much less against other currencies than against the US dollar and remains well below its launch value. However, a further sustained rise could hinder growth prospects. On the plus side, the euro's rise could help to lower the inflation rate by holding down import prices.