Belfast Telegraph

Bank warns of no end in sight to euro decline

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.

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, the bank's chief economist in the Republic, Simon Barry, said in his latest focus on markets.

"In the current environment 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," he said.

A sharp decline in the value of the euro is unlikely to be welcomed in Northern Ireland, where retailers and exporters have benefited from increased cross-border trade during the pound's prolonged period of weakness.

The report said the Greek situation had 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 decisive action is required immediately to demonstrate commitment to such a course of action," the report says.

The threat of a vicious circle between the financial system and the real economy of the euro area has resurfaced, said Mr Barry.

"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 1% level for another 12 months.

"Irish borrowers are likely to benefit from another year of record low rates," the report said.

Ulster Bank fears a sustained period of weakness in the global financial system could transmit itself into weaker business and consumer confidence, triggering lower economic activity in the eurozone. "The economic data for May has brought modest downside surprises but it's to tell whether this is a signal of a more ominous dynamic," it concludes.