The pound continued its fall against sterling yesterday closing at 81.11p, its lowest level in some 12 years. Traders in currency markets estimate that the value of the pound could decline still further as sterling continues its surge. Sterling is being pulled higher as investors seek higher interest rates than those available elsewhere in the EU. The expectation of a further interest rate increase in Britain is consolidating the strength of its currency. Sterling is also benefiting from the prospect of monetary union. The view that it could eventually join the monetary union at around 2.70 against the deutschmark - much lower than currently traded - has led to a speculative feeding frenzy. But investors are also hedging their bets; sterling is seen as something of a safe haven and a way of circumventing any turbulence that might come with the transition to monetary union. Already, those from the Republic travelling to Northern Ireland or Britain will be feeling some of the pain. Short-stay holidays in the North or Britain are now much less attractive; there is less incentive to visit the duty-free shop or the high street retailer.
There are more substantial grounds for concern. The Government, already battling to keep the inflationary pressures in the economy under check, will be anxiously watching the cost of imports from Britain. The continuing low rate of inflation would suggest that the big British retailers - faced with a very competitive retailing environment - have chosen to absorb the sterling/pound differential for now. But, clearly, this cannot continue indefinitely.
That said, the current exchange rates are also yielding substantial benefits for Irish exporters and manufacturers. They have helped to underpin the export boom revealed by the Irish Trade Board yesterday by giving a strong competitive advantage to Irish export into the British market. They have also allowed Irish products, notably food and groceries, to gain a much firmer place on British supermarket shelves. Irish industry has enjoyed other advantages; many importers of British goods have now opted to source the same goods at a cheaper price in the Republic. The benefits of a weak pound are also evident in the apparent boom in the number of British tourists coming to the Republic. Dublin is seen not just as a fashionable, trendy location for British tourists. It is, suddenly, a relatively cheap tourist destination for them, who effectively enjoy a 20 per cent discount on goods and services. The current exchange rates are not, of course, immobile. In the short term, sterling is poised to continue its surge on the markets, but a clearer signal that the British government will join EMU could transform the situation and see sterling tumble on foreign exchanges. It may be that the current pound/sterling differential will be as good as it gets for exporters and the tourist sector. If Britain enters EMU the Irish pound will probably trade at an effective exchange rate against sterling of around 90-95p. But if sterling remains outside it for a prolonged period - or slumps dramatically - Irish exporters would face a painful readjustment from the conditions enjoyed today.