Pressure is increasing on the European Central Bank (ECB) to raise interest rates, possibly this week, after sustained selling pushed the euro to a new low.
The dramatic fall in the single currency, which had largely been reversed late last night, underlines inflationary dangers across the euro zone. Figures to be published today are expected to show inflation at more than 2 per cent in January.
That exceeds the upper range of acceptable inflation for the ECB. It is likely to trigger an interest rate rise to 3.5 per cent on Thursday or, more likely, at an ECB meeting in Madrid on March 30th. Irish inflation will continue to top the euro zone league, although inflationary pressures are also intense in Spain and Portugal.
However, ECB president Mr Wim Duisenberg has given no hint so far of what his strategy is to be. He left a meeting of the €11 finance ministers yesterday without making a comment.
Ministers who commented insisted that the fundamentals in the euro-area economy of low inflation and significant growth would eventually be reflected in an appreciation of the currency. In the long run, the Minister for Finance, Mr McCreevy, said, the value of a currency reflected the underlying strength of the economy it represented.
After the meeting the Finnish Finance Minister, Mr Sauli Niinisto, said: "We are sticking to our common language [on the euro] as it was last time." Last month EU ministers issued a statement saying the euro had the potential to appreciate.
The euro plunged by 3.5 per cent early yesterday morning, to a new low of $0.9390, in almost panic trading in Tokyo but recovered somewhat in European and US trading to close at a little more than $0.97. However, analysts warned that the biggest sell-off in its 14-month history will undermine it further in coming days and weeks.
Dr Dan McLaughlin, chief economist at ABN Amro, said the sell-off was mostly related to a large surge in the yen's value against the dollar.
Analysts said the widening gap between US and European growth rates and conflicting signals from EU policy-makers about European interest rates persuaded traders to sell the euro.
The growth gap was highlighted last Friday when US gross domestic product figures showed the economy expanded at an annual pace of 6.9 per cent in the fourth quarter. This compares with a likely rate of just over 2 per cent for Europe. This year the US economy is expected to grow at around 4 per cent and Europe by 3 per cent and many in Europe are hoping that narrowing differential will help boost the euro over the rest of this year.
However, perceived differences among executive members of the ECB are also undermining the currency.
Miriam Donohoe adds: The president of the European Council said last night he was not worried in the long term about the euro's fall in value. In Dublin on a whirlwind visit, Mr Antonio Guterres of Portugal said the euro was "very solid" and necessary for stability and growth.
"I feel the value will increase as soon as the markets understand that Europe has a winning strategy for growth," he said after meeting the Taoiseach.