Central Bank spends £15m as fears grow over single currency

THE Central Bank spent up to £15 million yesterday buying Irish pounds in a bid to halt its slide against the deutschmark. The intervention is the largest in several months and came after the pound plummeted from the top of the ERM grid to the bottom in just one day.

The exceptional volatility of the pound puts a question mark over Ireland's ability to meet the exchange rate criteria for joining the single currency.

It could also lead to a massive sell off in the Irish bond market, according to some Dublin analysts.

The pound has slid by over seven pfennigs against the deutschmark this week, at the same time as gaining about 0.5p against sterling. The pound closed yesterday at 103.40p against the British currency and at DM2.3720.

"The key point is that it now looks as if we are a sterling clone rather than a currency in the Dmark bloc," said Dr Dan McLaughlin, chief economist at Riada Stockbrokers. "That makes us extremely unsuitable for EMU membership when we would be expected to track the D-mark rather than rise on sterling's coat tails."

He added that the situation was quite similar to early 1995 when the pound slid from DM2.40 to DM2.20 in a couple of weeks.

"This is a key turning point," he said. "We are sending a clear message to pound investors abroad that we see 103p against sterling as more important than 2.41 marks."

He also warned that much of the overseas money which came into Irish bond markets earlier this year on so called "convergence trades" could quickly leave, if investors decide that the pound is a sterling clone.

"The Irish bond market is either a cheap German market or a very expensive UK market. If investors begin to see us as the latter we could be facing a big sell off in bond markets."

The pound has followed sterling's fall against the D mark over this week. Sterling has had a "terrible couple of days", said Dr McLaughlin.

"It is quite obvious we are now a sterling satellite," agreed Mr Jim Power, chief economist at Bank of Ireland Treasury.

Mr Pat O'Sullivan, economist at AIB Markets, said the Bundesbank has made it clear it did not want to see the deutschmark strengthening. "A German repo rate cut should feed through to a weaker mark," he said.

He thought the fall of the pound might bottom out in next week or so. He added that expects it to be trading 102.90p against sterling and 2.385 marks later next week.

Sterling continued to fall yesterday despite the dollar stabilising against other major currencies. It had fallen with much weaker dollar the before.

The dollar stemmed its on the prospect of central intervention and Wall Street's recovery overnight.

Analysts are now looking even closer to Federal Reserve chairman Mr Alan Greenspan's testimony to Congress today for an official reaction to the recent market volatility.

"If the dollar falls further then you have the risk of G7 intervention overhanging the markets, so I don't think the markets will want to take the market down too far," said Mr Ian Amstad, international economist at Bankers Trust.

Nevertheless sterling continued to fall after it became clear that there was simmering disagreement between the British government and the Bank of England after the last interest rate cut on June 5th.