Inflation concerns ease as euro discovers new strength

The euro has risen to a two-month high against the dollar, raising hopes that Irish inflation could ease by more than expected…

The euro has risen to a two-month high against the dollar, raising hopes that Irish inflation could ease by more than expected next year.

The euro rallied over a cent to $0.89 yesterday and was set for further gains after the most impressive one-week solo performance of its short career, analysts said.

It stood firm at $0.8873 in late trading here, up from $0.8791 in New York on Friday, even shrugging off a US court ruling in favour of the dollar-friendly Gov George W. Bush.

"It is the best one-week performance [without intervention] since its launch [in January 1999]," Commerzbank currency analyst Mr Nick Parsons said. The euro has clawed back almost 6 per cent against the dollar in as many trading days, riding on signs that the tide may finally have turned. It has been recovering on the back of expectations that US economic growth will slow even further. By contrast, the outlook for the euro zone economy looks favourable and, as a result, some analysts believe this is the beginning of a sustained recovery in the currency.

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The German economy grew at 2.4 per cent in the third quarter - matching the US for the first time since 1995. The euro's rise accelerated as it passed through key levels on traders' charts, analysts said.

According to Mr Dermot O'Brien, chief economist at NCB Stockbrokers, the gains will mean an easing of inflationary pressures next year if sustained.

"Even if the euro were to remain stable, we would see a deceleration in inflation as the impact of last year's devaluation works its way out. But if we see a further appreciation, inflation would decelerate even faster next year."

The weak euro has been very positive for the State's competitive position.

But according to Mr O'Brien, the impact of the appreciation is unlikely to be substantial.

"In terms of the key multinational exporting sector, a recovery in the euro could be quite positive as it would help boost profit and loss accounts which have been suffering from the translation of euro profits back to dollars."