Pound at its lowest against sterling as euro suffers losses

The euro has suffered the biggest one-day loss of its history, pushing the pound to its lowest level against sterling.

In a dramatic day, the pound lost almost 2p against the British currency, closing at 72.24p, its lowest since it began trading independently of sterling in March 1979.

In late European trading the euro was changing hands at $0.8940 from $0.9061 a day earlier and at 57.40p against sterling from 58.03p. As a result, the pound fell to 72.24p from 73.68p.

According to Mr John Beggs, chief economist at AIB, there is now a real danger that, if left unchecked, the euro could move quickly to a $0.80-$0.85 range. That could mean the pound would fall as low as 65p to 69p against sterling, he added.

The extremely weak pound is already causing problems for importers, many of whom are finding life very difficult if importing goods from the UK or dollar priced goods such as commodities.

In addition, a further decline in the currency risks pushing Irish inflation above 5 per cent, according to Mr Beggs. There is no clear sense of how low the currency can sink. It has already plunged through all the levels where traders assumed it would hold up. According to Mr Jim Power, chief economist at Bank of Ireland, there is no appetite to buy it even at these levels. "The euro could sink to 85 cents, with the pound heading to 70p against sterling," he said.

But many analysts believe that the ECB will be forced to step in and intervene in the currency markets to buy the euro. It has so far resisted that temptation, believing it could just be throwing money way. But the collapse in the value of the euro may leave it with little choice.

It also has the advantage now that the market is generally "short" the euro which could make any intervention more likely to be successful, Mr Power pointed out.

According to Mr Beggs, the ECB should intervene if only to demonstrate that it is concerned about the fall in the value of the euro.

`The negative sentiment towards the euro is overdone but this is not going to change quickly. The ECB must demonstrate that it wants to see a higher value for the euro."

ECB vice-president Mr Christian Noyer said it had no secret wish to push the euro downwards. "We have voiced clearly our concern that this move has put pressure on price stability." Mr Beggs added that EU governments also have a role to play in preventing major currency misalignments. The markets suspect that many governments are happy to see a weaker euro that helps euro zone exports. And Mr Power pointed out that the finance ministers may have the opportunity to ask the G7 for help and express their concern at an Ecofin meeting next Monday.

There is little sign that bad news is imminent from the US. However, rampant home sales show the world's largest economy is growing quickly. That has raised speculation the Federal Reserve will lift interest rates several more times this year or in larger steps to cool growth. Mr Aziz MacMahon, economist at Ulster Bank Markets, pointed out that the collapsing euro made life even more difficult for the Bank of England's Monetary Policy Committee, which may increase rates today.

The Bank of England is thought to want to raise interest rates at least once more to cool house prices. However, the strong value of sterling is putting severe pressure on the manufacturing sector, which may even be going into contraction.