Euro's rise will hamper economy

 

Analysis: It is often a mistake to look for underlying "logic" behind moves on the foreign exchange markets. It is possible at the moment, for example, to construct a plausible case for selling the US dollar.

However, equally compelling reasons are evident for selling the euro, principally the dreadful growth prospects for the big euro-zone economies.

At the moment, currency traders are finding the case for dollar selling more compelling, hence the recent sharp fall in the US currency's value and the resulting rise of the euro.

Of course, forecasting currency movement carries a greater level of risk than predicting the winner of the 3.30 at the Curragh. But given the momentum now behind the dollar's descent, most analysts believe it can fall further.

The implications of this for the Irish economy are significant and, on balance, unwelcome. The higher euro value will put downward pressure on inflation by cutting the price of imports from the US, UK and other non-euro areas.

The poor level of demand should encourage retailers to pass these savings on, at least in more competitive sectors. A role for the much-trumpeted anti-inflation initiative under the new National Programme would be to monitor this and highlight places where savings are not being passed through to consumers.

While a lower inflation rate would be welcome, the rising euro will also slow growth by making exports to non euro-zone countries less competitive. The impact of this is all the greater as the euro has also hit new highs against sterling. This is crucial, as the UK is still our largest export market, accounting for 23 per cent of exports, with 18 per cent going to the US. Around 38 per cent went to the euro zone.

For Irish-owned industry, the dependence on the US and UK is even greater, with Enterprise Ireland estimating that 44 per cent of exports go to the UK market.

This leaves many companies on lower profit margins very exposed and this is likely to be reflected in redundancy figures over the balance of the year. Enterprise Ireland has been trying to get firms to diversify into euro and other markets and will launch a range of supports this week to further this goal.

However, with the main euro-zone economies in poor shape, it is not an easy time to start selling into these markets.

The extent of the economic impact will clearly depend on the extent of the euro's rise and, just as importantly, its duration.

A measure of the squeeze on exporters is provided by the Central Bank's trade weighted competitiveness indicator, a measure of the value of the euro weighted to take account of the Irish economy's trading patterns. Yesterday it was 10.2 per cent up on the same time last year.

Over the past couple of years, euro weakness had gone some way to compensate exporters for higher domestic costs. Now, however, the euro has turned while the inflation rate here remains twice the euro-zone average. This indicates that much of industry is now facing a significant squeeze. Unfortunately, if the currency forecasters are correct, this squeeze will tighten further in the weeks ahead.