Banks profit as revaluation rumour proves unfounded

The pound received a quick boost yesterday when more than £400 million poured into the currency in a couple of hours, only to…

The pound received a quick boost yesterday when more than £400 million poured into the currency in a couple of hours, only to be sold again just as quickly.

As a result, the pound closed a little stronger against the deutschmark at DM2.5582 in late trading from DM2.5433 on Thursday and at 90.30p against sterling from 89.86p.

Early yesterday, the pound surged on renewed revaluation talk. One news agency put up a headline which many interpreted as meaning that the governor of the Bank of Portugal was looking at the prospect of a revaluation of the escudo.

The Portuguese governor, Mr Antonio de Sousa, said he wanted to enter the single currency at a firm rate. The market decided that if a revaluation of the escudo was in the offing then a revaluation of the pound must be much more likely.

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Most of the buying was from British funds and banks, which were hoping to make a quick profit on the Irish currency. Traders said the Irish banks "made a fortune" when the revaluation rumours dissipated and the traders who had bought the currency had to re-sell it a couple of hours later.

Yesterday was the first time in a few months that the prospect of a revaluation has surfaced. It shows how quickly talk can spread through the markets, pushing up the value of the pound. Mr Kevin Daly, treasury economist at Ulster Bank, said the pound shot up from around DM2.55 to almost DM2.59, initially yesterday.

"When the report (about Portugal) came out, it became clear that the headline was misleading, basically the governor did not think there was much difference in the various mechanisms which have been proposed to convert to the euro. The implication was that there would be no great problem if central rates are used." It is also possible that Mr de Sousa was emphasising Portugal's wish to join the single currency after the events in Italy over the last couple of days.

Italy's chances have slipped after the resignation of Prime Minister, Mr Romano Prodi on Thursday.