Further fall in sterling puts pound in ascendancy

Sterling has continued its decline on the international currency markets, pushing the pound up further to 86.7p. The Irish currency has now recovered substantial ground against a weakening sterling over the past few trading sessions.

Market sources said that sterling had been driven down by some big selling orders over the past few days. This has seen the Irish currency rise from around 84p at the start of this month and it is now almost 6p above its 13-year sterling low of just over 81p reached at the end of March. The recovery in the value of the pound against sterling will be welcomed by the authorities here, as the decline in value of the Irish currency could contribute to higher inflation by pushing up the price of imports from the sterling area.

Most market forecasters believe that the fall in the British currency will not be reversed in the short term. Investors are now favouring the deutschmark, believing the German interest rates will be increased in the months ahead. Meanwhile, speculation is growing the British interest rates may have peaked, with the Bank of England again refraining this week from ordering an increase.

Sterling could hold in reasonably well at current levels in the short term, according to Mr John Begs, chief economist at AIB Group treasury. He believes that after its recent decline, the British currency may now enter a period of consolidation which will see it trade around existing levels. In the months ahead the British currency could start to ease further, he said. Any weak economic data from the British economy will reinforce the view that British interest rates have peaked and this would lead to a further easing in sterling's value. His forecast for the end of this year is for the pound to be valued at 89p sterling.

There is now intense speculation about an increase in German interest rates, with some analysts believing that an early rise is in prospect as the Bundesbank reacts to last weekend's messy compromise on the presidency of the European central bank. However Mr Beggs said that while he expected higher German interest rates later this year, he did not expect the Bundesbank to push up borrowing costs before the summer.

The mark, already sustained by speculation about the possible rise in German interest rates, benefitted further yesterday from a stronger-than-expected drop in German unemployment. In Dublin the pound closed at DM2.5155.

Elsewhere on the markets, the yen rallied against the dollar on the markets after comments by the Japanese finance ministers ahead of a G7 meeting in London.

The yen was trading in late afternoon at 132.88 to the dollar against 133.08 Thursday evening in London, and at 75.02 to the mark against 75.46. Ms Ros Lifton, an economist at HSBC Midland in London, commented that "The yen eased in the morning since the market expected negative American comment on the Japanese stimulus plan, but that did not occur" and the yen then rallied. Shortly before the G7 ministerial meeting in London, Japanese finance minister Hiraku Matsunaga said the United States supported Japan's economy policy. He also ruled out any reduction of the Japanese discount rate, now at a record low of 0.5 per cent.