Pound back above parity as sterling loses ground

THE pound has bounced back above parity as sterling came under heavy selling pressure yesterday in late trading on foreign exchange markets. The pound lost ground against both the deutschmark and the dollar and has fallen back slightly against most other European currencies.

While the Central Bank had an official close at 99.92p from 99.88p a day earlier, the pound had gained to 100.05p in late trading, according to dealers.

Sterling lost more than seven pfennigs on the day - it had risen as high as DM2.6370 in Far Eastern trading and closed at DM2.5548. Dealers said the markets were thin and sterling was first pulled higher by buy orders as it travelled upwards and then fell rapidly as the sell orders kicked in.

It was a chaotic day in the markets. Talk that British businesses are starting to complain about the strength of sterling and then speculation that the Bank of England had been selling the currency served to produce huge amounts of profit-taking. Traders said it was unlikely that the bank had been in the market.

However, the pound failed to take advantage of sterling weakness and there was very little activity in the market. Traders said it would take a lot to reverse the general mood of the last couple of weeks that the pound needed to be taken lower.

Although traders believe that sterling may have a little further to fall it will quickly regain ground. Mr Jim Power, chief economist at Bank of Ireland, said he believed sterling would again test DM2.60 in the near future.

Almost all the recent data have pointed to a buoyant British economy, increasing speculation about further interest rate rises. The futures markets is pricing in two quarter-point rises in British interest rates by next March.

But economists have been warning that the authorities may feel that the currency has risen far enough. British companies are already concerned that the four-year highs which sterling has reached is damaging competitiveness making exports more expensive and cheapening imports.

With consumers spending freely an interest rate cut is out of the question - leaving little room for the currency to be reigned in.

"Its got to the level now at which the authorities may be slightly concerned, in terms of how much stronger the currency can be allowed to get," said Mr Ciaran Barr, UK economist at Deutsche Morgan Grenfell in London.

But ultimately most authorities are talking their currencies down. Only the dollar and sterling are happy with a stronger currency. The dollar is gaining on comments that it may be more suitable than the mark as a reserve currency in the run-up to monetary union. The dollar shot to 23-month highs against the deutschmark, French franc and Swiss franc in overnight dealings after comments by German and US officials on the dollar's status as a reserve currency.

Latest output data for October, released on Tuesday, showed pan-German industrial output down 1.8 per cent on the month and west German output falling 1.7 per cent. After September's decline, the markets had bet on an improvement.

However, speculation about a further cut in German interest rates is divided but expectations German monetary policy might be close to a turning point are farfetched, analysts said. The Bundesbank is likely to be very concerned to avoid a D-mark resurgence which would hurt German exporters.

Figures released yesterday also suggest that the Bank of England did not try to dampen sterling by selling it for other currencies. British official reserves fell $98 million (£58.2 million) in November, after rising $7 million in October.