Inflation fear as battered euro slumps to new lows

A further decline in the value of the euro has driven the pound to its lowest level against sterling for 15 years. The pound fell to 79.63p sterling in late dealing in Dublin. Further sustained weakness will feed through to higher inflation here through a rise in import prices.

The euro yesterday fell to its lowest level against the dollar and the yen since its launch in January, reaching $1.008 around the middle of the European trading session and closing in Europe at $1.012.

The fall increased doubts in the financial markets about the credibility of euro-zone policymakers and raised the likelihood of Bank of Japan intervention to weaken the yen.

The Japanese currency strengthened against the dollar to reach four-year highs.

However, the focus here was on the fall in the euro against sterling and the US dollar, which dragged down the value of the pound against the currencies of two of our major trading partners. This could quickly feed through to higher import prices.

A range of consumer goods are among the items imported from Britain, while the rise of the dollar will feed through to higher oil and petrol prices.

Economists here believe that the euro - and thus the pound - could yet fall further.

Ms Aziz McMahon, treasury economist at Ulster Bank, said there had been a change in market sentiment since October, with the US markets continuing to prosper despite the interest rate rise by the US Federal Reserve Board.

She also said that increased competitiveness in the retail sector and the fact that goods imported from Britain were in competition with those coming from other euro zone states would limit the inflationary impact for the Republic.

Traders said that, in contrast to the very thin currency markets of recent weeks, which have exaggerated price movements, there was a reasonable amount of dealing during the European trading session yesterday.

Several said the euro was likely to fall through the one-to-one parity level against the dollar next week and that large automatic sell orders, set to come into effect at just under parity, could then accelerate the drop.

"I now believe we will see the euro fall to 95 US cents this year," one dealer in London said.

Market participants said the strength of the yen against both the euro and the dollar meant that the Bank of Japan was more likely to intervene to weaken its currency, which has been threatening to derail Japan's nascent economic recovery.

Yesterday Mr Kiichi Miyazawa, the Japanese Finance Minister, was reported as saying he had authorised his officials to order intervention if necessary.

Earlier this year the Bank of Japan wrong-footed the foreign exchange markets by getting the European Central Bank to intervene on its behalf in the euro-yen currency pair.

Some analysts said the euro's fall called into question the commitment of euro-zone governments to economic restructuring and could threaten the policy credibility of the ECB.

"Recent events, such as Mr Gerhard Schroder intervening in the Vodafone-Mannesmann takeover, have received a lot of attention in the market," said Mr Ray Attrill, research director at the economic consultancy 4Cast. "They encourage a feeling that Europe is not open for business."