Not for the first time consumers woke up yesterday to discover that the euro had collapsed overnight. But on this occasion the extent of the decline was much greater than before with the currency falling almost three cents in the early hours of the morning as panic set in among Tokyo traders.
But it is the nature of currency trading that exchange rates rise and fall quickly. The real issue here is whether the continuing decline in the currency is a symptom of some deeper malaise in Europe - a crisis of confidence - or if it is merely a reflection of exceptionally strong growth in the US.
If a perception were to build that the decline is a symptom of a flawed currency and economy, foreign investment into the euro zone economies, including the Republic, could slow, undermining the ongoing economic recovery.
But for the moment the main impact the declining value of the euro is likely to have on most people is through higher interest rates, a step which will be necessary to fight the potential inflationary threat. The European Central Bank is meeting on Thursday and opinion is fairly evenly divided on whether it will raise rates. If it does, it is likely to mean rate increases for many homeowners. Some banks and building societies have not yet raised variable rates in response to the last rise. However, there can be little doubt that they will be forced to move if base rates are pushed up again.
It is true that the euro zone is a fairly closed economy which does not rely much on the outside world. Thus the value of the currency is not all that important. Moreover, a weak currency helps exports, and therefore growth. At the same time, if it falls quite dramatically - as the euro has done - it will have an impact on inflation. After all, oil prices have almost doubled, but in euro terms they are up even more. That is likely to mean overall euro zone inflation of over 2 per cent when the figures are released later this week.
The other side of the coin is that a strong currency tends to support the stock market and hence investment. This is the argument which is currently winning in the US and it could be that the weak euro is likely to hold back investment growth.
The main catalysts for the most recent decline in the currency were figures on Friday which showed that the US was growing at almost 7 per cent. That is a remarkable figure for a mature economy such as the US, and particularly so when it has been growing more quickly than almost anywhere else for several years, with little sign of inflation.
Many analysts argue that this is possible because of higher productivity through new technology.
They argue that the US can grow at around 3.5 per cent without generating inflation whereas the equivalent figure for Europe is only 2.25 per cent to 2.5 per cent, as it is more reliant on old technology and has more restrictive labour and other markets.
As Dr Dan McLaughlin, chief economist at ABN Amro, points out, there has been a substantial flow of investment money out of Europe into the US over the past year, but very little traffic the other way around.
Europe also suffers from a range of other problems, including a perception that the ECB itself is unsure how to proceed, unlike, it is argued, the omnipotent US Federal Reserve and its now almost legendary chairman, Mr Alan Greenspan. The ECB has been constantly accused of inconsistency and of speaking with several voices. The markets often have no clear idea whether there will be an interest rate move even days in advance. The US Fed, in comparison, marks its moves far more clearly.
Although the next ECB meeting is on Thursday, analysts are still deeply divided over whether it will increase interest rates. The US meeting is towards the end of March but already almost every analyst has decided that it will increase rates.
ONLY last week the ECB was giving out conflicting signals and there appeared to be disagreement at the top on whether further rate rises are on the cards immediately. This weekend the Bundesbank president, Mr Ernest Welteke, said there was no need to discuss interest rate rises at present. However, that was before the latest collapse in the currency's value.
For many months now many analysts have been predicting that the euro will begin to rise again. They say the narrowing growth differential between the two economies should kick start this process.
In 1999, the US economy grew at 4.1 per cent, whereas the equivalent euro zone figure is likely to be 2.1 per cent. Expectations are now for US growth of 4 per cent in 2000 with 3 per cent in Europe. Normally, that would be enough for these predictions to come true. However, the dollar is now worth about 2 deutschmarks which is at the extreme end of the historical range. This suggest that the markets at least believe there are structural problems.
But even if this is true it is still a position that could reverse. Dr McLaughlin points out that the Germans have gone from a position 18 months ago where the prospect was of rising corporate, and possibly personal, tax rates under the former finance minister, Mr Oskar Lafontaine. Now that is reversed and tax rates appear to be coming down while rules governing share ownership in companies are also being relaxed in a move which is expected to lead to an acceleration of corporate takeover activity. These are both likely to be positive for sentiment and hence for the euro.
But over the course of this year, analysts are deeply divided over where the euro is going. Goldman Sachs recently estimated a level round $1.10, whereas ABN Amro believes it will remain below parity until next summer. Short term of course, the factor which matters most is whether investors need to buy the currency or not. At the moment most investors have more euros than they need, having bought into the rising euro story at the beginning of this year. It will take some time before these supplies will begin to run out and it will only be then that the currency is likely to come in for any sustained bounce.
