Euro reaches fresh highs and is likely to continue climbing

The euro has hit new four-year highs on the foreign exchange market, trading above $1.15 yesterday before falling back slightly in later trading. Market analysts now believe that the euro can continue its ascent in the weeks ahead.

Last night in a research note, Davy Stockbrokers warned that companies with a euro cost base and sales in sterling or dollars "will be particularly squeezed", while those selling into the Irish economy will face a slower growing market.

Over the past week, the euro has hit its highest level since January 1999 against the beleaguered US currency and surpassed its launching prices against both the yen and sterling. The European Central Bank's decision to hold interest rates steady on Thursday underscored the primary pillar of the euro's rally - the relatively higher returns investors receive holding European assets as opposed to lower-yielding US financial instruments.

The single currency traded late yesterday just below $1.15, off the day's lows near $1.1450 but below a new four-year high at $1.1535 reached in London trading. The euro is now about 2 cents from its launch price at $1.17. It slipped from a high of 71.94 pence against sterling to stand around 71.60 pence.

Euro-zone politicians are becoming restive about the euro's gains, underscoring the delicate line between an appropriately priced currency and an overvalued one. French Prime Minister Mr Jean-Pierre Raffarin said it would be "worrying" if the euro reaches a level that hurts exports.

Meanwhile, new figures yesterday showed that industrial output in Germany contracted more sharply than expected in March, underlining the persistent weakness of the euro zone's biggest economy.

The Labour and Economy Ministry in Berlin calculated that industrial output fell by 1.1 percent in March, more than wiping out the tentative 0.2 per cent increase seen the previous month, although the figure may be revised upwards.

In Dublin, Davy, in their weekly market comment, pointed out that over the past year the euro has appreciated by close to 15 per cent against sterling and 20 per cent against the US dollar.

"In terms of the old sterling/Irish pound exchange rate, that is the equivalent of a jump from 78p to close on 90p; and from $1.10 to $1.45 in terms of the old dollar/Irish pound rate."

The brokers warn that "this will go some considerable way towards reversing the significant competitive gains that occurred during the weak exchange rate regime of the latter part of the 1990s".

Between 1995 and 2002, wage levels in Ireland increased by a cumulative 52 per cent, compared to 28 per cent in the US, but the difference was more than offset by a fall in the old dollar/Irish pound from $1.60 to $1.20. Over the same period, earnings in the UK rose by a cumulative 36 per cent, but this too was more than offset by a fall in the sterling/Irish pound rate from 102p to 80p. - (Additional reporting, Reuters)