Euro forecast to slump below 80p
Published 17/06/2010 | 05:00
THE euro will fall below 80p sterling by the end of the year, and could go as low as 70p, economists at Ulster Bank have forecast.
The threat of a vicious circle or "negative feedback loop" between the financial system and the real economy of the euro area has resurfaced, chief economist Simon Barry says in his latest focus on markets.
"Market concerns about unsustainable public finance trends have forced euro-area governments to announce additional fiscal correction measures. While absolutely necessary, such action does constitute a further headwind to recovery," he says.
One conclusion is that the European Central Bank will not raise interest rates from their 1pc level for another 12 months. "Irish borrowers are likely to benefit from another year of record low rates," the report says.
Given the difficulties facing the eurozone economy it is difficult to justify the current level of the euro and further falls are on the cards, Mr Barry said.
"In the current environment and we expect further declines by year-end to $1.12 and 78p. There is a risk of an undershoot, in the event of another major shock to the eurozone, which could see a return to parity or lower against the dollar and to 70p sterling."
The report says the Greek situation exposed important weaknesses in the institutional and governance framework underpinning the euro area.
"It also gave investors plenty of time to consider the extent of vulnerabilities in other member states, which has given rise to heightened concern about the ability of countries across the eurozone, and beyond, to manage very large budget deficit and debt positions.
"The fragile state of the debt markets means that decisive action is required immediately to demonstrate commitment to such a course of action," it says.
It sees a danger that a sustained period of weakness in the global financial system could transmit itself into weaker business and consumer confidence, triggering a lurch lower in real economic activity.
"The economic data for May has brought some modest downside surprises, but it is difficult to tell whether this is merely some payback for prior strength or a signal of a more ominous dynamic.