Euro falls against Sterling and US Dollar according to Bank of Ireland’s February Bulletin

The euro has had a bad winter, having fallen substantially against the other major currencies over the past two months. From an Irish perspective the key change has been the decline against sterling and the US dollar as the euro’s strength against these currencies, notably the former, has had a significant influence on the economy over recent years, putting downward pressure on prices and employment according to Bank of Ireland’s latest Bulletin which was published today, 2 February 2010.

Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “Three years ago a euro bought under 66 pence sterling but by December 2008 the slide in the UK currency had brought that figure to 98 pence. A currency appreciation boosts the purchasing power of consumers, either directly in this case for anyone crossing the border into Northern Ireland, or indirectly via lower import costs, although this impact can be diluted depending on the trend in retail margins. For exporters, however, it usually results in either a squeeze on profit margins or a decline in demand, with negative knock-on effects for employment, and the UK market represents a much higher export share for Irish indigenous firms than the 16% figure derived from the aggregate export data.

“Most studies show that sterling is substantially undervalued against the euro, with 75 pence seen as around ‘fair’ value, and we have argued that sterling is likely to appreciate from recent lows against the single currency over time. The decline in the euro sterling rate of late has seen it trade below 87 pence and although a short term euro rally is possible we still feel that the 84 pence lows of last June are likely to be revisited by mid-year.

“The euro has also fallen against the dollar, although again the current level (around %1.39) is still substantially above the %1.15 – %1.20 range seen as fair value. The dollar’s appreciation, which has been broadly based, may in part be due to the relative good performance of the US economy of late, with GDP in the final quarter of 2009 rising by 1.4%, compared with just 0.2% estimated in the euro area. The perception that continental Europe is underperforming the US is also evident in longer term interest rates, with the yield on 10 year US bonds rising sharply relative to German bonds over the past two months. Investor concerns about fiscal deficits of some of the euro’s peripheral economies, notably Greece, have also played a part as has market positioning, with speculative traders now selling the euro against the dollar from being buyers of the euro for most of 2009. We believe that relative economic performance is a strong driver of currencies so, in the absence of an acceleration in euro growth relative to the US, the euro may remain under downward pressure against a resurgent US dollar; we have cut our forecast for end-March to %1.35 from %1.40”, concluded Dr. Dan McLaughlin.

Ends

2 February 2010

For reference:

Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221

Anne Mathews
Media Relations Manager
Group Communications
Bank of Ireland
Tel: 01 604 3836