Sterling closed below the value of the old Irish pound for the first time in 12 years yesterday, and analysts warn it still has further to fall.
At the close of Dublin trading, sterling was quoted at 78.77p to the euro -- just above the 78.76p level at which the Irish punt disappeared into the euro in 1999. The last time the British currency was worth less than the Irish one, was in 1996.
Sterling recovered in New York trading last night. But analysts at AIB forecast that the British pound would average 78-80p to the euro over the coming three months, before recovering to around 74p in the first quarter of 2009.
"Sterling will remain sensitive to interest-rate news and development on financial markets," said chief economist John Beggs.
"If, as we suspect, the Bank of England has to lower UK rates by more than it is currently indicating, sterling could come under further pressure. With all key resistance levels now gone, we could not rule out a move above the 80pc level in the short term," AIB Global Treasury's latest Exchange Rate Outlook says.
It said sterling was generally seen as overvalued against the euro, dollar and yen in recent years and now seemed to be experiencing a fundamental correction. "There are increasing concerns about the large and widening current account deficit, which hit an estimated 4.7pc of GDP last year," it said.
Sterling briefly plunged below 79p to the euro during Monday's market panic, after the "firesale" of investment bank Bear Stearns. As happened before, Irish exporters who depend on the British market say they cannot compete above levels around 73p to the euro.
The Irish Exporters Association and the Small Firms Association have both warned about loss of jobs in the exporting sector. "A continued fall in the value of sterling would have a severe impact on the indigenous exporters in Ireland," said John Whelan IEA chief executive.
The dollar remained weak yesterday, as investors saw more rate cuts reducing the yield from dollar assets. "It's still a very dollar-negative environment, as the Fed is expected to cut to about 1.5pc by mid-year and this leaves the larger dollar sell-off trend still in place," said David Powell, a currency strategist, at IDEAglobal in New York.