Fears of US rates rise hit dollar

The dollar fell back a little in value yesterday on fears that a US rate rise may be imminent.

The euro rose against the US currency, closing at $1.0730 having opened at $1.0620 after trading as low as $1.0570 on Tuesday. However, economists said the strength was temporary and the euro is likely to resume its decline over the coming weeks.

According to Saloman Smith Barney economist Mr Michael Saunders, who was visiting Dublin yesterday, the gains will be short lived. He is expecting the euro to fall back to $1.02 over the next three months and with that, the pound could be heading towards 81p against sterling.

According to Mr Saunders, the dollar will remain strong as US growth will continue to be stronger than most expectations. In contrast, growth in the euro zone will remain modest at about 2 per cent and further interest rate cuts are likely, despite rapid growth here and in other peripheral countries.

Mr Saunders says the Irish economy will probably expand by 10 per cent this year and next year simply because costs are lower, as well as the boost from the interest rate cuts. "Growth will stay strong until the economy loses competitiveness through higher inflation or wage growth or if there is a big change in fiscal or taxation policy, for example at EU level."

Mr Saunders expects the Bank of England to continue cutting interest rates, although probably not at today's meeting of the Monetary Policy Committee. "They will wait to see average earnings declining and will thus wait a month or two," he said. "The Bank of England wants to see sterling fall as exporters are being killed with it at these levels." He added that rates will have fallen to 4.5 per cent by the end of this year from 5.25 per cent at the moment.