What currency changes mean for Ireland

0

The Euro has been drifting against the Dollar for some time, but has been strengthening against the British Pound for months.

But what that means for consumers — and especially businesses — can be hard to pinpoint.

When it comes to currencies, there are always two sides to the coin.

What’s going on with the pound sterling?

We need your consent to load this content rte-playerWe use rte-player to manage additional content which may place cookies on your device and collect data about your activity. Please check their details and accept them to load the content.Manage preferences

The euro has been strengthening against the pound for around five months now – at one point this week it was around 8% stronger compared to mid-April.

This is happening because markets are increasingly worried about the state of the UK economy – inflation there is even worse than in Ireland and in the euro zone Brexit is stifling its ability to recover from the pandemic and he has borrowed a huge amount of money, with more to come to fund recently announced tax cuts.

In real terms, this fall in the pound equates to around 6 to 7 pence more per euro. So it’s not really upsetting.

But keep in mind that even before its recent change, historically speaking, the Euro was already in quite a strong position against the British Pound.

When the euro was first launched 22 years ago, it brought you around 70 pence.

Now it gets you closer to 90p.

Brexit is part of the cause. Once the Brexit vote passed in mid-2016, the pound fell off a cliff, and while it started to recover earlier this year, all of that has been undone in recent months.

So what does this mean for consumers here?

This can be both positive or negative, depending on the situation.

The thing to remember is that a strong currency means it is more expensive – a weak currency means it is cheaper.

So with the pound around 8% lower over the past few months, this essentially means that UK goods and services are 8% cheaper than before.

In real terms, that’s only a few cents difference, so day-to-day purchases probably won’t be noticeably cheaper.

But the larger the purchase, the greater the savings.

So if you were to pick up a large item like an iPhone; the entry-level model costs €1,029 in Ireland. Based on the April exchange rate, the price of the British pound is about 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 around €80 cheaper.

That’s not to be sniffed at, but perhaps not enough to justify the trip to buy the device.

So that’s probably not enough to have a huge impact on consumers here?

Maybe not yet – that means buying in the UK is slightly cheaper now, but other factors are hampering the savings somewhat.

Previously, you might have been able to take advantage of the exchange rate by buying from UK websites, but given the Brexit tariffs and customs fees, you’re not going to gain much in the end.

But that dynamic could change quite quickly if things continue to slide – as some have predicted.

Larry Summers – a former US treasury secretary – thinks the pound could eventually reach parity with the euro, so one euro would buy you a pound, and that could have a huge impact on the appeal of buying cross-border.

This iPhone would suddenly cost you around €180 less in Belfast than in Dublin, for example.

And a big problem for Irish consumers would be the fact that a trip to the UK would suddenly become much more attractive too.

Your flight will probably be priced in euros, so it won’t make a difference there, but if your hotel, your meals, your concert tickets were all suddenly 15% cheaper, it will make a big difference to you.

Is sterling’s weakness also good news for businesses?

Not really.

In theory, this means some will be able to import goods more cheaply, but Brexit means companies won’t automatically realize big savings just because the currency is weaker.

And even when it makes sense for companies to buy from the UK, it could be bad news for an Irish producer. They may be the ones losing that order because they just can’t compete with someone pricing in a weaker currency.

And these types of growers could be hit hard, as they will find it harder to sell their produce in the UK.

Ireland exported €18 billion worth of goods to the UK last year, but if prices from these exporters are suddenly higher, through no fault of their own, they become less competitive.

The same dynamic is happening on the consumer side.

An Irishman going on a weekend trip to the UK may find it a bit cheaper now, but the reverse is also true – a UK resident traveling to Ireland now has to pay more for hotel, meals and entertainment .

It could lead them to spend less money when they are here or, depending on the severity of the situation, it could deter them from coming.

And all those other ways Irish consumers could get a good UK deal is also potentially bad news for the Irish economy.

If a trip to the UK becomes much cheaper, someone might decide to take a weekend trip to Liverpool rather than Limerick, which is bad news for domestic tourism.

If everything is guaranteed to be cheaper in Newry, especially large items, they might also decide to do their big Christmas shopping across the border rather than in a local store.

What about the dollar?

The Euro continues to weaken against the Dollar, and the change has been much more pronounced than what we have seen with the British Pound.

At one point this week, the euro was up to 14% lower than the dollar compared to March. In real terms, you get around 16 cents less for your euro today than six months ago.

This is happening because markets believe the Eurozone is heading for a tough winter in terms of energy supplies, as well as a recession. Traders also tend to fall back on the dollar as a safe haven when they are unsure of what will happen next.

But that means all of these issues that arise for UK residents and businesses looking at Ireland and a stronger euro, we’re looking at the same with the US and the dollar.

So now it’s more expensive to buy goods in the US than it was six months ago – it’s actually as if US companies are raising their prices by 12-14%.

This will be especially noticeable to anyone who may travel to the United States in the near future. Especially compared to five or six years ago when you were getting around $1.20 per euro – or in 2008 when it was over $1.50.

The days of people flying to New York with empty suitcases to do their Christmas shopping are well and truly over!

But another unfortunate side effect for us is the impact this has on commodities, especially fuel prices.

The price of oil is in dollars – and if the dollar costs us more, then oil costs us more too.

If you look at the oil markets, you can see that crude oil is currently trading around 33% below the highs reached in June.

Data from AA Ireland suggests unleaded prices here also peaked in June at around €2.13 a litre.

If prices at the pump had equaled the 33% drop seen on the market since then, a liter of petrol should now be less than €1.43. In fact, it is currently bottoming out at around €1.70.

And a lot of that is because the dollar change has undone some of the price improvements we might have seen in the meantime.

Is there any advantage to the dollar being so strong?

There are.

Not all, but many companies here will actually be quite happy with the current situation.

In fact, it could benefit the Irish economy far more than the strength of the euro against the pound.

Irish exporters may find it harder to sell in the UK due to the weaker pound, but they should find it a bit easier to sell in the US now.

This is because their prices will seem much more competitive thanks to currencies.

£52.5 billion worth of Irish goods were exported to the US last year – and they are now considerably cheaper for buyers there, without exporters having to cut their real prices.

In a small number of cases, Irish businesses could also see better sales here and across Europe, as they will now be more competitive with European buyers than US-based businesses.

What about tourism?

The hospitality sector may lose a bit from the UK, but it is likely to gain even more from the US, as a trip to Ireland has suddenly become much cheaper for US travellers.

And although there are fewer American visitors to Ireland than British visitors, we already know that they are far more important to the economy.

This is because when they come, they tend to stay much longer, they tend to travel across the country rather than staying in one city, and they tend to spend a lot of money.

Surprisingly, American visitors already think Ireland offers good value for money – and if the currency switch makes everything 14% cheaper for them, they’ll think they’re getting an even better deal.

This is particularly important at this time – at a time when people may be starting to lock in reservations for next summer.

But if the current exchange rate holds – or if the dollar gets even stronger – then that means every dollar they spend getting 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, that means a euro-based salary suddenly weighs less on a US company’s bottom line than it did before.

It also means that the investment here – perhaps new offices or equipment – is also a bit cheaper.

Multinationals – especially tech companies – are currently looking to scale back their operations around the world, so the fact that Ireland is now a bit cheaper than before could help cushion us from the worst.

At best, it could even lead to companies moving their business from other parts of the world to Ireland, in order to take advantage of lower costs.

Share.

About Author

Comments are closed.