Dollar under fresh pressure

European markets started the new year on a high and the dollar came under fresh pressure on the opening trading day of 2004.

Leading economists last night warned that the euro could strengthen against the dollar to as much as $1.30-$1.35 over the coming weeks, putting further pressure on Irish exports to the US.

The dollar clawed back some of its recent losses yesterday as trade resumed in earnest after the Christmas break. The euro was quoted at $1.2588 at close of business.

Stock markets were boosted by strong economic data from the US which fuelled hopes that the continuing economic recovery will boost corporate profits.

The US Institute of Supply Management's December figures showed an increase in the pace of expansion, with the index up to 66.2 from November's already strong 62.8.

It was the largest rise in the index in 10 years.

"Numbers like this are going to help maintain the positive momentum we've been seeing for several months now," said Mr Richard Iley, an economist at BNP Paribas.

Earlier, the euro zone purchasing managers' index edged slightly higher above the 50 level that marks expansion, touching 52.4 in December from 52.2 in November.

Stock markets closed the session at 16-month highs in Europe, with technology and telecommunication heavyweights leading the way. "It's been a quiet day but the tone is positive. There is a sense that some of the big blue-chips which have underperformed last year's rally may be due for a run," said one London-based trader.

The rise in the ISM was fundamental in the dollar's fightback yesterday. However, Irish economists said last night that they believed the dollar's recovery would be short-lived.

Mr Aziz McMahon, of London-based ABN-Amro told The Irish Times that it was possible that the euro could go as high as $1.30 in the short term. At the same time, the Economic and Social Research Institute's Dr Danny McCoy predicted that it could test highs of $1.35.

"I think we are heading for $1.30," Mr McMahon said. "There is some risk next week that there will be a correction down from $1.25.

"We have just had very strong data from the US manufacturing sector, but those gains may be only weakly supported."

Mr McMahon said the euro would only reach its upper limit against the dollar once there was a clear indication that the US Federal Reserve was prepared to increase its historically low interest rates.

"There hasn't been any indication that that is going to happen," he pointed out.

"We will need to see a recovery in jobs, and the Fed will need to be confident that a rise in rates will not damage that. Until that point, it's going to be very difficult for the dollar to make any significant gains."

He warned that further weakening of the dollar would make it difficult for Irish businesses selling goods and services to the US.

The currency declined by 17 per cent against the euro in 2003, a fall which has already squeezed the margins made by Irish companies doing business in the US.

However, he said a weak dollar could help to ease some inflationary pressures in the Irish economy.

Dr McCoy said that the ESRI was sticking to its position that the euro would be more realistically valued at $1.10 to $1.15.

However, he predicted that the euro would go as high as $1.35 before beginning to recover. He suggested that the rate could average around $1.20 this year, compared with $1.13 in 2003.