New lows for euro expected as revival of dollar continues

The euro is set to test new lows against the dollar in the coming days, dashing hopes that the single currency had turned the corner and taken the heat out of Irish inflation in the process.

The euro fell to 10-week lows against both the dollar and sterling yesterday after the European Central Bank (ECB) decided, as expected, not to raise interest rates at its last meeting before the summer break.

In Dublin, the euro closed at $0.9044. In early trading in New York it fell below $0.90, later paring back its losses to $0.9050. It is now within almost two cents of its record low against the US currency of $0.8840, which it reached in May. "The euro is in an unfortunate position because the US Federal Reserve remains in a hiking cycle and the dollar is going to go up," said Mr Mike Moran, treasury economist with Standard Chartered in London.

The US Federal Reserve could raise rates as soon as August 22nd, further widening the gap between the two currencies. The ECB does not meet again until August 31st.

The euro's recovery since its May lows had led commentators to postulate that the upward spiral in Irish inflation - the highest in the euro zone at 5.5 per cent - might be easing off. Along with oil prices, the weakness of the single currency was cited by the Minister for Finance, Mr McCreevy, as a factor beyond his control that was driving inflation.

"The market is ignoring all the positive economic news coming out of Europe and selling the euro," said Mr Jim Power, chief economist at Bank of Ireland Treasury in Dublin. The problem has been amplified by thin trading, which means that relatively small deals can have a disproportionate impact, he said.

Despite a generally positive outlook for the European economy, sentiment towards the euro remains overwhelmingly negative. "If it does test its previous lows, I expect that it will exceed them," said Mr Power.

The euro closed at 60.51p sterling, which translated into an Irish pound closing price of 76.83p sterling, down almost 1p on the day. The British currency was also down against the dollar after the Bank of England left its rates unchanged at its monthly meeting.

"It is all going to add to inflationary pressures," said Mr Power. The Government has already conceded that inflation will be between 4.75 per cent and 5.25 per cent this year, well ahead of its original forecasts. The peak - which could be in excess of 6 per cent - had been expected towards the end of the summer, but may now be delayed. Under these circumstances, the Government may be forced to take more drastic action, including the abolition of the Grocery Order, which bans below-cost selling.

The ECB left its interest rates unchanged after its regular council meeting in Frankfurt yesterday. The bank's key minimum bid rate, used in weekly refinancing auctions, remains at 4.25 per cent. The rate on its marginal lending facility was kept at 5.25 per cent. "If the euro continues in a tailspin, the ECB might react at the end of August," said Mr Manueal Preuschi, an economist with Deutsche Bank. The council of the ECB reconvenes after its summer break on August 31st, when a rate rise is expected.

Uncertainty about the outlook for the euro and interest rates fed into European stock markets and prompted another exodus from technology stocks. The sector was down nearly 6 per cent and all of Europe's major markets fell.

France's CAC-40 index suffered the steepest slide, down 2.7 per cent. Britain's FTSE 100 dropped 1.2 per cent, while Germany's DAX was off 1.6 per cent. In Dublin, the ISEQ closed up 0.52 per cent at 5,212.3, buoyed by strong interest in financial stocks.

Early losses on Nasdaq were reversed in later trading which closed up 2.77 per cent.