Euro's 15pc decline against dollar makes sense in current crisis -- BoI
THE euro's decline against the dollar would be justified on economic grounds, even without the government debt crisis, Bank of Ireland analysts said in their latest bulletin.
The single currency has fallen 15pc against the dollar, taking it to a four-year low below $1.22 and a far cry from the high of $1.60 recorded two years ago.
"The speed of the recent fall appears to have unnerved some European policy-makers, but the decline in the euro is appropriate given recent economic developments," said Dan McLaughlin (right) , group chief economist at the bank.
The eurozone economy grew by just 0.2pc in the six months to the end of March, against 0.7pc in the UK and 2.2pc in the US.
"This wide divergence in relative economic performance has resulted in a substantial shift in interest-rate expectations in favour of the dollar," the bulletin says.
"The risk of a Greek debt default and the political confusion surrounding the subsequent bail-out has also hit confidence in the euro, of course, but in the absence of that development, the single currency would probably have fallen anyway given its mediocre growth performance," Dr McLaughlin said.
"Euro growth should now benefit from the currency's fall as it may boost exports, and it should also be noted that the euro is still far from being cheap. Most studies put the 'fair value' for the euro/dollar rate at around $1.20 at most -- coincidentally its average value over the past decade -- implying that it has been significantly overvalued for the last few years.
"We now expect the currency to trade in a $1.20 to $1.25 range, with the risks to the downside. But speculative traders have sold the euro to an unusually large degree, which means that they have to buy the currency at some stage, which offers the best short-term support," Dr McLaughlin said.