Euro-sterling: In addition to the sharp correction in domestic property markets, international factors have been the source of significant headwinds facing the Irish economy. Earlier in the year, a relentless surge in global energy and other commodity prices was a considerable drag on purchasing power.

More recently, the severe escalation in the financial crisis since September has added materially to the tightening of credit conditions as well as to the downside economic momentum here and in our main trading partners.

Developments last week on the currency markets add further to the challenges facing Ireland Inc., especially those exporters with exposure to the British market, as the euro surged in value to hit its highest ever level against sterling at 95.5p.

British economic and currency weakness was again very much in focus last week – a particularly brutal combination from an Irish perspective given that nearly half of all exports from Irish-owned firms are headed in that direction.

Contracting economic activity in Britain translates into a shrinking market for exporters operating there, while the euro’s surge in value shrinks the euro value of sterling receipts earned through exports.

The latest British jobs numbers were shockingly weak, with the number of claimants for unemployment benefit surging by almost 78,000 in November – the worst month since the depths of the early 1990s recession. With the jobs market deteriorating at such a rapid pace it is little wonder that activity on the High Street is coming under profound pressure. One prominent monthly survey of retailers recorded its lowest reading in its 25-year history in December (though official numbers are not painting quite as bleak a picture as that, just yet at
least).

In fairness, Bank of England has been both quick and forceful in responding to the sharp deterioration in the performance of and prospects for the British economy of late. The bank's ultra-aggressive approach to cutting rates has seen a truly remarkable 2.5% lopped off official British rates at the last two meetings alone and soundings from last week suggest further reductions are a formality from their present generation low of 2%.

The BoE’s willingness to contemplate even more easing stands in contrast to the ECB's apparent disinclination to follow suit. Several senior ECB officials, including president Jean-Claude Trichet, last week expressed reluctance about cutting rates again in January and this relatively hawkish rhetoric from the ECB has been an important factor in the euro's rapid and sizeable ascent vs. sterling of late.

The serious weakness in the UK numbers also provided the market with the excuse it needed to continue selling sterling enthusiastically. It was trading at a then-record level of around 90p this time last week, but by lunchtime on Thursday had soared to a new high of over 95.5p.

To put that level in context, in mid-December last year, the euro/sterling rate was trading at around 71p, so the move to last week’s high represented a savage 35% appreciation in just 12 months. For those with memories long enough to recall the pain of the early 1990s currency crisis (in which the peak for the old sterling-punt rate was a little more than £1.10, 95.5p corresponds to about £1.21 in ‘old money’.

Given the strength of momentum behind this move, it would be imprudent to rule out further weakness for the out-of-favour British currency in the current environment. There was, however, some modest late-week relief for exporters, as the euro slipped back to around the 93p mark. We remain of the view that sterling is in undershooting territory and hence has room to recover from current levels.

We may not be far (both in terms of time and market levels) from the point at which the British unit stages a turnaround. After all, the outlook for the euro area economy is far from rosy. In the meantime, those who import from Britain have the opportunity to buy sterling at extremely attractive levels.