Sterling strength forces pound back to 15-year low

The pound has fallen to its lowest level in more than 15 years as sterling continues to soar on the foreign exchange markets.

The Irish currency is now close to falling below 80p for the first time since 1994 when the State was the sick man of Europe and the markets were enthused by British prime minister Margaret Thatcher.

The pound closed at 80.44p against sterling from 80.90p last Friday as sterling rose against the dollar and the euro.

The euro closed at 63.35p against sterling from 63.64p a day earlier as the market concentrated on possible further UK rate rises.

A report in a London newspaper that the British Chancellor of the Exchequer, Mr Gordon Brown, is cooling on membership of the single currency also boosted sterling. And, according to Mr Jim Power, chief economist at Bank of Ireland, rumours that a large package of spending will be unveiled at the Labour Party conference also pushed the currency higher.

A large spending package on health and education would make it more likely that the Monetary Policy Committee of the Bank of England would vote for another rate increase, Mr Power noted.

Dr Dan McLaughlin, chief economist at ABN Amro, added that the vast majority of the MPC members voted to raise rates at the last meeting and the implication of that must be that there will be another rise soon.

He added that sterling appears likely to test its high against sterling over the past five years of DM3.11. The high yesterday was DM3.095. At the same time, the euro is remaining around $1.04 to $1.05 and, according to Dr McLaughlin, is unlikely to go anywhere until a series of rate rises look to be on the cards.

Mr Power added that there is now a very good chance that the pound will fall below 80p against sterling. "If sterling falls to 63p against the euro it takes us down to 80p."

He pointed out that this has consequences for imported inflation. "Every penny we go lower has consequences for imported inflation going forward. This will seriously squeeze the margins for people importing from the UK."

However, it also boosts the competitiveness of those exporting to the UK and, according to Mr Power, they should now consider converting sterling reserves into pounds as these levels will not last long.

At the same time, the dollar inched higher against the yen after Japan hinted that it may agree to new policies aimed at taming its currency. The Japanese prime minister Mr Keizo Obuchi said he hoped to form a new cabinet by the weekend to consider a package of steps to put the economy back on the recovery track. Dealers said Mr Obuchi's remarks helped support a statement by the G7 industrialised countries at their weekend meeting which expressed concern over yen strength and sparked hopes that Japan would implement stimulus measures.