Euro continues to climb

The euro took its lead from indications that the Bush government was abandoning its strong dollar policy yesterday, capturing a new four-year high against the beleaguered US currency.

The euro surged past $1.16 in early trade, up from Friday's New York close of $1.489, as investors took US Treasury Secretary, Mr John Snow, at his word when he said the weaker dollar was good for his country's exporters.

The dollar fought back slightly in the afternoon however, falling to $1.156 as profit-takers moved in on the European currency.

The catalyst for the early move, which many analysts believe was overdone, was Mr Snow's weekend hint that his administration would no longer pursue a strong currency against the backdrop of a "soggy" economy.

The markets reacted immediately, pushing the euro to within an inch of its 1999 launch value of $1.17 and intensifying pressure on euro-zone exporters.

Former Taoiseach, Mr John Bruton, yesterday accused the Government of making "a major strategic mistake" by failing to take account of rising exporters' costs in the national wage agreement.

He called on the Government and the social partners to investigate the insertion of "a currency appreciation/depreciation mechanism" into the agreement.

This would allow, he said, for the mitigation of exporters' costs when the euro rises and appropriate compensation for their employees when it falls.

"An automatic stabiliser is needed because Ireland is far more exposed to fluctuations in the euro than any other economy in the euro-zone," Mr Bruton said.

Mr Niall Duggan, head of FX Sales, Bank of Scotland (Ireland), has predicted further euro gains over coming days, noting that a raft of US data due for release later this week is likely to include a stimulus for further selling.

Mr Duggan said he was not confident in the euro's ability to hold on to its gains, however. He pointed to the fundamental weakness of the euro-zone economy, and the seeming indifference of European Central Bank (ECB) policymakers towards the euro's recent ascent.

ECB president, Mr Wim Duisenberg, told reporters last Friday that the euro was not yet causing him concern.

"If that continues and the dollar remains at these levels, euro-zone companies will feel a lot of pain," Mr Duggan said.

It is likely, however, according to Mr Duggan, that some of the forthcoming US data will be positive, thus triggering a correction in exchange rates over coming months.

Ulster Bank financial markets economist, Mr Niall Dunne, is also sceptical on euro strength, predicting that the current dollar decline has "gone too far" and will be corrected by a steady move back to between $1.10 and $1.12 against the euro.

"It has overshot a little and passed where it should have gone," he said.

This stage of the dollar's decline could also be stemmed by Japanese intervention, Mr Dunne suggested.