A further rise in the value of the euro would damage competitiveness, the governor of the Central Bank, Mr John Hurley, has warned.
Mr Hurley's comments, made in an interview with Reuters news agency, came as the euro started to edge back upwards following a dollar rally since the weekend.
The euro was trading late yesterday at $1.1720, as the dollar rally ran out of steam. It touched over $1.18 last week, close to its all-time high.
Mr Hurley, who is also on the governing council of the European Central Bank (ECB), reiterated the Central Bank's view that restoring competitiveness was vital.
"We have seen an increase in the strength of the euro in recent years from a low level which didn't reflect fundamentals," he said
"But nevertheless that strengthening unmasked a deterioration in our competitiveness and, clearly, a significant strengthening in the value of the euro relative to the present position would make our competitive position far more difficult," he said.
The Central Bank has previously warned that it believed some companies in the indigenous sector could be " hoarding" jobs, in other words holding onto employees not needed at the moment, in the hope of an upturn. A renewed rise in the value of the euro could hit the competitiveness position for these companies, particularly if sterling gains against the single currency as well as the dollar.
The rise in the euro in the last two months is also hitting confidence in Germany, where investor confidence unexpectedly fell for the first time in 10 months, according to the ZEW institute's investor expectations indicator. It fell 0.6 points to 60.3 in October, below analysts' expectations for an increase to 62.5.
For Ireland, the Central Bank is forecasting a 2.75 per cent rise in Gross National Product (GNP) next year, up from 1.5 per cent expected for this year, based on a gradual international recovery.
"I think I'm more confident than I was some months ago that the recovery, which is a gradual and moderate recovery, is under way, (but) the pace of the recovery and the strength of the recovery very much remains to be determined," said Mr Hurley.
He put trend growth for Ireland at between 4 and 5 per cent but said he did not expect the economy to return to that level on average before 2005.
Following recent comments from the outgoing European Central Bank president, Mr Wim Duisenberg, at the weekend, Mr Hurley said financial markets misunderstood a recent statement by the Group of Seven richest nations calling for greater foreign exchange flexibility.
"The intention was clearly to refer to adjustments in the exchange rate to deal with macro-economic imbalances being spread more widely across regions, and by regions what was meant in that context was Asia," he said.
"But there was no intention to refer to the euro/dollar relationship so I think that was a misunderstanding of the statement." The euro soared to levels above $1.18 last week, but in light of the G7 statement it has since retreated slightly.
