Weakening dollar trend threatens exporters' incomes
Published 03/05/2011 | 05:00
IRISH exporters should brace themselves for falling incomes as the euro strengthens even further against the US dollar over the rest of the year, currency experts warned last night.
It comes as new figures show that inflation is still a significant issue in the eurozone -- a factor that is sure to prompt the European Central Bank (ECB) to raise interest rates.
It means the euro will strengthen against other currencies, particularly the US dollar, according to Justin Doyle, the head of foreign exchange at Investec.
"The ECB is petrified of inflation, but the US Federal Reserve is more worried about unemployment," said Mr Doyle.
"Irish exporters will be the ones taking the hit," he said.
The value of every dollar earned by Irish exporters has already dropped by close to 25pc in the past year, as the US currency fell from about $1.20 per euro last June to just under $1.50 per euro now.
The trend is set to worsen because of the major difference of opinion between the US and European central banks.
Some Irish businesses do stand to benefit, including airlines that spend a large part of their outgoings on dollar denominated goods such as oil.
Last week, the US central bank, the Federal Reserve, indicated it would keep interest rates "exceptionally low" until unemployment was brought under control.
US unemployment is at 9pc. In contrast, the ECB will use even modest increases in the rate of inflation to raise eurozone rates further.
"Eurozone interest rates will be as high as 2.5pc by this time next year -- which could kill growth in peripheral economies including ours, but won't hurt Germany because it's already growing so fast," Mr Doyle said.
He said the US would keep interest rates at their current low, unless inflation there edged above 2.5pc this year.
The Federal Reserve has said it thinks inflation will be between 2.1pc and 2.8pc in 2011, falling to 2pc next year.
The most recent eurozone figures showed inflation in the big European economies continued to rise last month. Irish exporters have already been living with the start of this trend.