Euro takes breather as it reaches for parity

The major foreign exchange markets paused for breath yesterday after the surge that saw the euro reach a two-year high against the dollar and a 17-month peak against sterling on Monday.

Analysts expect the respite to be brief, however, with many repeating predictions that the euro could strengthen to reach parity with the dollar within a matter of days.

The European currency was trading at just a shade above $0.97 yesterday afternoon, down from the $0.98 peak it touched the day before.

Against sterling, it continued to strengthen, rising by less than 1p to reach £0.6477 late in the afternoon.

A combination of sustained weakness in both sterling and the dollar, as is likely, would spell bad news for exporters across the euro zone, who will see the competitiveness of their euro-denominated products diminish among buyers in the US and Britain.

This would be particularly ominous in an already sluggish continental economy, which currently counts exports as one of its most vibrant facets.

In the case of the Republic, which last year sold almost a quarter of its exports to Britain alone, the currency situation is a source of significant worry, according to Mr Alan McQuaid, chief economist with Bloxham Stockbrokers.

Mr McQuaid says that continued weakness in the dollar and sterling could be particularly dangerous for small Irish firms, which are already struggling under what he calls "excessive" wage demands.

Most analysts expect sterling movements in the medium term to be heavily influenced by the continuing uncertainty surrounding Britain's entry to EMU.

Mr McQuaid believes sterling, which has fallen by 6.5 per cent since the start of the year, will enter EMU at about 68 cents, based on the likelihood of a British referendum on the subject in 2003. In the meantime, he foresees sterling trading around current levels, although he acknowledges that a rise in Britain's interest rates could take it higher.

Mr Aziz McMahon, foreign exchange analyst with ABN Amro in London, yesterday expressed caution about the euro's capacity to rise beyond parity against the dollar in the short term, and said that further gains against sterling would probably peak at 66p.

Mr McMahon said Irish businesses should be careful not to view sterling and dollar strength as a fatal threat to their competitiveness in the global economy.

"By any measure, the Irish economy remains extremely competitive," he said, highlighting the relatively high productivity among Irish workers.