Coining it: What currency shifts mean for Ireland
The euro has been drifting against the dollar for some time now, but has been getting stronger against sterling for months.
But what this means for consumers – and particularly businesses – can be hard to pin down.
When it comes to currencies, there’s always two sides to the coin.
What’s happening with sterling?
The euro has been getting stronger against the pound for about five months now – at one point this week it was about 8% stronger when compared to mid-April.
That’s happening because markets are increasingly worried about the state of the UK economy – inflation there is even worse than in Ireland and the eurozone, Brexit is stifling its ability to recover from the pandemic, and it’s borrowed a huge amount of money, with more to come to fund recently-announced tax cuts.
In real terms, that dip in the pound equates to around 6-7 pence more per euro. So it’s not exactly earth-shattering.
But bear in mind that even before its recent shift, historically speaking, the euro had already been in a fairly strong position against sterling.
When the euro first launched 22 years ago, it bought you around 70p.
Now it’s buying you closer to 90p.
Brexit is a bit part of the reason for that. Once the Brexit vote passed in mid-2016 sterling fell off a cliff, and while it had started to recover earlier this year, all that has been undone in recent months.
So what does that mean for consumers here?
It could be both a positive or a negative, depending on the situation.
The thing to remember is that a strong currency means it’s more expensive – a weak one means it’’s cheaper.
So with sterling around 8% lower in recent months – that essentially means British goods and services are 8% cheaper than before.
In real terms that’s only a few pence in the difference, so every-day purchases probably won’t be noticeably cheaper.
But the bigger the purchase, the bigger the saving.
So if you were to take a big ticket item like an iPhone; the entry level model costs €1,029 in Ireland. Based on the April exchange rate, the sterling price works out at roughly the same.
But based on this week’s exchange rate, the same phone would cost you €949 if you bought it in the UK – so that’s about €80 cheaper.
That’s not to be sniffed at, though maybe not quite enough to justify the trip to buy the device.
So it’s probably not enough to have a huge impact on consumers here?
Maybe not just yet – it does mean buying from the UK is slightly cheaper now, but other factors kind of get in the way of any savings.
In previous times you might have been able to take advantage of the exchange rate by buying from British websites, but given Brexit tariffs and customs charges you’re ultimately not going to gain much.
But that dynamic could change quite quickly if things continue to slip – as some have predicted.
Larry Summers – a former US Treasury Secretary – thinks that sterling could ultimately reach parity with the euro, so one euro would buy you one pound, and that could have a huge impact on the attractiveness of a cross-border purchase.
That iPhone would suddenly cost you about €180 less in Belfast than Dublin, for example.
And a big one for Irish consumers would be the fact that a trip to the UK would suddenly become a lot more attractive, too.
Your flight is probably going to be priced in euro, so it won’t make a difference there, but if your hotel, meals, concert tickets were all suddenly 15% cheaper, that’s going to make a big difference to you.
Is weaker sterling good news for businesses here, too?
In theory it means some will be able to import products for less but Brexit means that firms aren’t automatically going to see a big saving just because the currency is weaker.
And even where it does make sense for companies to buy from the UK, that could be bad news for an Irish producer. They might be the ones losing out on that order because they simply can’t compete with someone that prices in a weaker currency.
And those kinds of producers might be hit on the double – because they’re going to have a harder time selling their products in the UK.
Ireland exported €18 billion worth of goods to the UK last year, but if those exporters’ prices are suddenly higher, through no fault of their own, they become less competitive.
The same dynamic happens on the consumer side.
An Irish person going on a weekend away to the UK may find it’s a bit cheaper now but the reverse is also true – a British resident travelling to Ireland is now having to pay more for their hotel, their meals and entertainment.
That could lead to them spending less money when they’re here or – depending on how bad it gets – it could put them off coming altogether.
And all of those other ways that Irish consumers might bag a British bargain is potentially bad news for the Irish economy, too.
If a trip to the UK gets a lot cheaper, someone might decide to go on a weekend away to Liverpool rather than Limerick, which is bad news for the domestic tourism trade.
If everything is guaranteed to be cheaper in Newry, especially the big ticket items, they might also decide to do their big Christmas shop across the border rather than in a local shop.
What about the dollar?
The euro is still getting weaker against the dollar, and the shift has been far more pronounced than what we’ve seen with sterling.
At one stage this week the euro was as much as 14% lower against the dollar when compared to March. In real terms you’re getting around 16 cent less now for your euro than you were six months ago.
That’s happening because markets think the eurozone is heading for a rough winter in terms of energy supply, and a recession too. Traders also tend to fall back on the dollar as a safe haven when they’re not sure of what’s going to happen next.
But that means that all of those issues cropping up for British residents and businesses looking at Ireland and a stronger euro, we’re looking at the same thing with the US and the dollar.
So now buying goods from the US is more expensive than it was six months ago – it’s effectively like US firms raising their prices by 12-14%.
That will be particularly noticeable to anyone who might be travelling to the US in the near future. Especially compared to five or six years ago, when you were getting $1.20 or so per euro – or back as far as 2008 when it was sitting above $1.50.
The days of people flying to New York with empty suitcases to do their Christmas shopping are well and truly behind us!
But another unfortunate side effect for us is the impact this has on commodities, particularly the likes of fuel prices.
Oil is priced in dollar – and if the dollar is costing us more, then oil is costing us more too.
If you look on oil markets you can see that crude oil is currently trading about 33% lower than the peaks it hit in June.
Data from AA Ireland suggests that unleaded prices here also peaked in June at around €2.13 per litre.
If pump prices were to have matched the 33% fall seen on the market since then, then a litre of petrol should now be under €1.43. In reality, its currently bottoming out at around €1.70.
And a large part of that is because the dollar shift has undone some of the price improvements we could have seen in the mean time.
Is there an upside to the dollar being so strong?
Not all, but a lot of businesses here will actually be quite happy with the current situation.
In fact there are far more ways that this could be beneficial to the Irish economy than the strength of the euro relative to sterling.
Irish exporters may have a harder time selling to the UK because of sterling’s weakness, but they should find it a bit easier to sell to the US now.
That’s because their pricing will seem that much more competitive thanks to the currencies.
€52.5 billion worth of Irish goods were exported to the US last year – and they’re now considerably cheaper for buyers over there, without the exporters having to reduce their actual prices.
In some small number of cases, Irish firms may also see better sales here and across Europe, because they will now be more competitive to European buyers than US-based firms.
What about tourism?
The hospitality sector may lose out a bit from the UK, but it’s likely to gain even more from the US, because a trip to Ireland has suddenly become significantly cheaper for US travellers.
And while there are fewer US visitors to Ireland than UK visitors, we already know they’re far more important to the economy.
That’s because when they do come they tend to stay a lot longer, they tend to travel around the country rather than just staying in one city, and they tend to spend a lot of money.
Surprisingly US visitors already think Ireland offers good value for money – and if the change in currency makes everything 14% cheaper to them, they’ll think they’re getting an even better deal.
That’s particularly important at the moment – at a time when people may be starting to lock in bookings for next summer.
But if the current exchange rate holds – or if the dollar gets even stronger – then it means that every dollar they spend when they get here will be worth even more to us.
But another interesting side-effect is the potential benefit it could have on foreign direct investment.
If the euro is weaker against the dollar, it means that a euro-based salary is suddenly less of a burden on a US firm’s bottom line than it was before.
It also means that investment here – perhaps new offices, or equipment – is also that bit cheaper.
Multinationals – particularly tech firms – are currently looking to scale back their operations around the world, so the fact that Ireland is now that bit cheaper than it was before might help to shield us from the worst of that.
At best it could even lead to firms shifting operations from other parts of the world to Ireland, in order to take advantage of the lower costs.