Is the long-awaited recovery of the euro finally underway? The currency ended last week at just under 92 cents to the dollar, as fears grew about the outlook for the US economy. US growth remains so sluggish that the US Federal Reserve Board (Fed) is widely expected to announce a further interest rate cut tomorrow, probably by 0.25 of a percentage point. Despite lower borrowing costs, however, an early uplift in US growth is far from certain and hence some analysts are anticipating further dollar weakness.
The euro may thus maintain its recent recovery. But a sharp rise in its value should not be expected. The US economy remains sluggish, but growth in the euro zone has also fallen away. Germany, the EU's largest economy, is experiencing a significant slowdown and the rest of the major euro zone economies are also suffering. This is hardly a recipe for a surge in the euro's value over the coming months, although as foreign exchange markets are so heavily driven by sentiment, forecasting currency values is a tricky business.
The prolonged slowdown in growth on both sides of the Atlantic should send a clear message to policymakers. The Fed has already acted decisively, reducing its key market rate by 2.75 percentage points this year to 3.75 per cent. Together with tax reductions which will shortly benefit US consumers, this may be enough to generate some recovery in US prospects moving into next year. However, such has been the fall-off in business investment that there is still a risk that the expected recovery will be delayed.
If it is, this will be bad news for Europe. The major EU economies have been hit by the US slowdown and by the global slump in the information technology sector. Recovery in the US would help the euro zone by boosting export growth and restoring confidence. But Europe must also try to help itself.
Here, a considerable responsibility rests with the European Central Bank. It has so far announced one interest rate reduction earlier this year. A second cut is now overdue. The ECB meets next week and must realise that the risk of a further slowdown now outweighs the dangers of inflation. A reduction in euro interest rates would take time to feed through to borrowing costs, but it would have an immediate impact on confidence.
In the Irish economy, growth remains more robust, although it is slowing and confidence has been hit by job losses in the technology sector. With inflationary pressures easing, lower interest rates would carry few dangers for our economy and might indeed provide some support for confidence. In the longer term, a healthy euro zone economy is vital for the economic outlook here.