The European Central Bank faces increasing pressure to intervene in support of the euro after the single currency fell to new lows yesterday against the dollar, yen and Swiss franc.
The fall will increase pressure on prices in the Republic, where the year-on-year inflation rate of 6.2 per cent in July was the EU's highest. Figures to be published today may reflect a slight fall in inflation during August but further increases this month and next are expected, economists said.
As central bankers in the influential G10 group repeated the view of euro-zone finance ministers that the currency's rate was out of line with economic fundamentals, it fell to a new low of $0.8567 before rising to $.8616 at the close of business in Europe. But it drifted to around $.8580 in thin US trade last night.
The currency - introduced at $1.17 in January last year - was trading at $0.8970 a week earlier.
In trading yesterday the euro also fell below 91 yen and 1.53 Swiss francs. The euro's losses against the dollar helped drag down sterling below the $1.41 rate for the first time in more than seven years.
Analysts claimed traders wanted to see how far down they could drive the currency before officials were forced to intervene.
"The market will continue to test how far the euro can go. There's every possibility that it will continue to go lower in the weeks ahead," said AIB's chief economist, Mr John Beggs.
The ECB has so far shirked intervention, but the French Finance Minister, Mr Laurent Fabius, said last week that this was a tool that was always available.
"There's every possibility it will go lower. The more it goes down, the more likely intervention becomes," said NCB Stockbrokers chief economist, Mr Dermot O'Brien of the euro rate against the dollar. Such a move could be contemplated if a "minor rebound" followed further falls, Mr O'Brien said.
The Bank of England governor, Mr Eddie George, said central bankers believed the euro would bottom out before strengthening to reflect continued economic growth in Europe.
Speaking after a meeting of G10 central bankers in Basel, Switzerland, Mr George declined to state whether the ECB should intervene to support the currency but cited the comments of Mr Fabius.
An economist at Bank of Ireland group, Mr Niall O'Sullivan, said ECB intervention should be contemplated only with the support of the Federal Reserve in the US, the Bank of Japan and the Reserve Bank of Australia.
Stating that the markets would have to undertake a "fundamental reassessment" of the euro's value, Mr O'Sullivan said nothing in the past two weeks had warranted the gains enjoyed by the dollar.
Mr Beggs forecast a 6.1 per cent year-on-year inflation for August, stating that a 0.1 percentage point decline since July would reflect lower mortgage rates last year after the entry of Bank of Scotland (Ireland) to the market. A move to an annual rate of 7 per cent was likely towards the end of the year, Mr Beggs said.
Mr O'Brien forecast year-on-year inflation for August of 6 per cent. This was due to slight decline in petrol prices during July which would filter through to the August figures. The rate would rise to 6.3 per cent or 6.4 per cent in September or October, and to 6.6 per cent or 6.7 per cent in November before dropping in December.
Mr O'Sullivan said there was nothing to stop year-on-year inflation rising to 6.5 per cent in August.
