April has proved to be a very volatile month in investment markets. However, investors may be surprised to learn that the actual decline in global equity indices was only of the order of 2 per cent to leave the world equity index more or less unchanged year-to-date.

Of course this average does mask some very sharp divergences in country and sectoral performances. In particular, technology stocks saw extremely sharp falls as highlighted by the 17 per cent decline in the Nasdaq index during the month.

The currency markets were not immune from the turbulent conditions being experienced in the equity markets. In contrast to equities, volatility in the currency markets has remained within normal bounds.

However, the main feature of currency trading in April was the further sharp fall in the value of the euro that leaves it trading somewhat precariously above 91 US cents. This is a long way from the $1.18 (€1.21) level at which the euro was introduced over a year ago amid much fanfare.

For Irish investors the euro's weakness is something of a double-edged sword. Unlike the majority of their Continental counterparts, Irish private investors have long invested in overseas markets. For many years UK equities were a favoured home for funds given the familiarity of many of the UK blue chip companies.

More recently Irish private investors have invested in the US stock market. The booming domestic computer market has led many individuals to invest in companies listed on the US Nasdaq market.

The euro's weakness in recent months will have resulted in currency gains on these US and UK investments.

However, the euro is now at levels where it is beginning to act as a disincentive to investing further sums in overseas markets.

For example, a share such as Marks & Spencer that is trading at £2.50 sterling (€4.05) will cost an Irish investor £3.40. Clearly if the euro continues to weaken then investors can continue to purchase UK and US shares and expect to see their returns enhanced with currency gains.

In the short-term it does seem as if there will be little respite in the euro's relentless decline. The recent quarter-point rise in euro interest rates seemed to create even more weakness in the currency.

Furthermore, no matter how fast euro interest rates rise it does seem as if US rates will rise even faster. While the European economy is now growing at a healthy 3 per cent per annum, it cannot keep pace with the even more vibrant US economy. Therefore, rapid US growth and higher US interest rates seem set to continue to underpin a strong dollar.

Although a recovery in the euro's value does not seem likely in the short-term, on any longterm basis the currency looks to be very undervalued. While a reversal in the current trend would reduce gains in overseas stocks, the greater risk to equity portfolios lies in the prospects for higher euro interest rates.

Partly as a result of the weak euro, inflation rates are now picking up across Europe. In most countries the rise in inflation is barely perceptible although the Republic's inflation has now hit a 10-year high.

Higher interest rates are the only weapon at the European authorities' disposal to stave off inflation.

A factor that could force the European Central Bank to accelerate the pace of interest rate rises would be if the US Federal Reserve began to take a more aggressive approach to raising US interest rates.

Whatever the future direction of the euro exchange rate is, it is clear that the recent weakness has sharply increased the chances that euro interest rates could rise quite sharply as the year progresses, and this interest rate uncertainty is likely to continue to unsettle equity markets.