Exchange rates are a powerful dynamic in the global economy as they impact on competitiveness, wealth and corporate well-being.
The currencies of the world’s largest economies move like tectonic plates and provide long term effects that influence huge populations worldwide.
Over recent weeks and months three key currencies – sterling, the dollar and the euro – have seen changes that if sustained have implications for the economy of Ireland.
Despite all the bearish forecasts about the fate of the euro, most particularly from the clown-Brexiteers, the currency of the EU has strengthened materially against both the dollar and sterling.
Relative to the dollar the euro strength is a bit of a surprise as America has enjoyed buoyant economic growth and signs of rising interest rates. However, less confidence that President Trump inspired changes to taxation could occur soon, together with strong economic data across the eurozone, has helped propel the euro to a three-year high against the dollar.
Against sterling it is not hard to see why the euro is thriving. UK economic growth is waning, the prospect of interest rates lifting has faded as the Bank of England fights the Brexit effect and the divorce of Britain from Europe is going from bad to worse. Hence, sterling is trading near an all-time low against the euro.
This raised level of the euro is good news for anyone who has their wealth denominated in euros. It means your purchasing power in sterling and dollars has increased. This can be crystalised in a number of ways. Firstly, goods and services denominated in the UK and US currencies can be imported at a lower cost.
A retailer, for example, should be able to buy products at a lower euro price and benefit from generating higher margins or by selling greater volumes by lowering prices. Another opportunity is to acquire assets in the UK and US at favourable exchange rates if you believe long-term trends are positive for the American and British economies.
These are large sophisticated economies that are likely to produce value over many decades so owning assets in them can pay off, especially if sterling and the dollar recover.
It is worth reflecting on the condition of the euro amid these times of heightened geopolitical volatility and tensions. The club of euro sceptics is remarkably quiet these days. It is not so long since some very high profile so-called experts were arguing that Ireland should leave the euro and even possibly consider joining the sterling block. That opinion lies somewhere between deluded and moronic in the cold light of hard facts.
The Irish economy is thriving currently due to a number of inputs but being part of the euro is a central factor. Being in that currency exposes us to unfettered access to the world’s largest and richest economic block.
Moreover, it is ECB inspired record low-interest rates that have driven down the cost of borrowing for private enterprises, individuals and the Irish exchequer.
This is having a transformational impact on the ability of borrowers to service debt and for individuals and companies to access borrowings at low-interest rates.
There are two manifestations of these effects in Ireland currently. Mobile global investors are continuing to announce major investments in Ireland, a feature compounded by Brexit related relocation decisions. Secondly, domestic investment, particularly in the construction sector, is picking up fast.
If Ireland can sustain a combination of strong foreign investments and a recovering domestic economy, the recent statistics showing unemployment falling to new lows can continue. If that is the end result of being part of the euro it a prize worth chasing.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.