Euro will tumble as US recovers, says economist

The euro will fall from parity against the dollar before the end of the year, declining to $0.92 within 12 months, a leading economist told a Dublin investment seminar yesterday.

Mr Adam Chester, chief economist with HBOS, parent of Bank of Scotland, said the dollar would increase in value as the US economy started to recover and investors began to place more faith in US assets. He expects the euro to fall to about $0.94 before April next year.

This process is already under way, Mr Chester believes, pointing to tentative signs of recovery in the US economy. He predicts US economic growth of up to 2.7 per cent next year, noting that the current level of US interest rates is "very accommodative" towards such a trend.

A drop in the value of the euro would, in theory, be a positive development for Irish exporters since it would make the price of their goods more competitive.

Mr Chester is not optimistic about the prospects for the euro- zone economy, however, forecasting maintained sluggish growth, particularly in Germany, the area's largest economy.

He believes the German economy is in danger of suffering a double-dip recession early next year. Noting that Germany is set to breach the deficit limits set by the Stability and Growth Pact, Mr Chester said the pact was in need of urgent reform.

One potential modification to the rules would be to separate current and capital spending when considering a state's budgetary performance, Mr Chester suggested.

He also believes it would be more appropriate to judge economic discipline over periods of up to seven years rather than the one-year numbers which are currently considered.

Mr Chester warned that a productivity gap is about to emerge between the US and euro-zone economies as an American recovery takes hold.

He said the widening gap between the US and the euro-zone economies offered the European Central Bank (ECB) space to cut interest rates, forecasting an easing of 25 points to be introduced as early as next month.

A rate of 2.75 per cent can be expected by the end of 2003, according to Mr Chester, acknowledging that such a development would be unlikely to match the needs of the Irish economy over the longer term.

Mr Chester expects GDP growth of 4.6 per cent in the Republic next year. He predicts an easing in consumer spending and personal credit levels to develop as the year progresses.