/www.fxserver.com/ DURING the past few weeks this column has discussed how a downturn in the global economy will impact on Irish growth, irrespective of our domestic circumstances.
To support this argument, you only have to look to the exchange rate between the euro and the US dollar, which rose to a three-year high last week. This time last year, €1 was worth 86 US cents. Now, €1 will get you $1.05. That's a 22% appreciation in less than 12 months.
This is fantastic news if you plan on making a trip to the US this year. But it's not so good if you're making that trip to sell Irish goods and services to US customers because our exports have suddenly become a fifth more expensive.
Again, thanks to circumstances beyond our control, our competitiveness has been eroded. Pessimists are already worried that dangerously high claims for wage increases currently being pursued by unions will be sufficient to deter multinationals from investing or expanding here in Ireland; now they also have to worry that the strengthening euro will impact our attractiveness.
The problem is we have no mechanism left with which to react to currency appreciation. In pre-euro days, when we traded in punts, currency devaluation was always an option to protect our exports.
That's no longer feasible and there's no doubt exporters are set to suffer in the year ahead thanks to the euro's strength.
At this point it's useful to look ahead, to briefly examine the factors causing the dollar's fall and to forecast whether or not we can expect it to strengthen again. Obviously, the uncertainty currently dominating the market is the imminent threat of war.
It's reasonable to expect the dollar will weaken further in the build up to what looks like an inevitable campaign, and when hostilities actually break out nervous investors are likely to abandon dollar-denominated assets, which could see the euro rally as high as €1.07 or €1.08.
Most observers expect a quick resolution to the war, and if the campaign is concluded in a matter of days, a relief rally will likely see investors flock back to the US which will send US stocks and the dollar higher.
However, even if the dollar strengthens back to €1.03 immediately after war, it's set to depreciate steadily over the remainder of 2003.
After the war is over, the question of how it is to be paid for will arise. The US Federal Budget is already $250 billion in the red this year and a military campaign will not prove cheap.
Bonds will have to be issued to pay for the war, and this form of borrowing is expensive. This will weaken the dollar. In addition, the US currently has a massive trade deficit.
So it suits the US to let the dollar weaken to boost its domestic industry and manufacturing.
The bad news for exporters is the euro is not going to fall back to levels below parity. We will have to learn to cope with a fairer exchange rate for the single currency at current levels.
The Government could arguably help more if they stopped fuelling inflation by increasing excises taxes and charge, which drive claims for wage increases.
But it's not all bad news. While joining the euro meant we forfeited the alternative of devaluing our currency, we got historically low interest rates in exchange. A stronger euro will also reduce inflation on a pan-European level and allow the ECB to cut rates again in mid-year to drive recovery. And, for all multinationals operating here at present that earn profits in euro, the single currency's rally is something of a windfall.
Now when they repatriate their profits back to the US, they get more dollars in exchange for their euro, boosting their profitability. Perhaps every cloud does have a silver lining.