Pound falls back against deutschmark

THE pound has fallen back against the deutschmark as the markets ruled out the possibility of any cut in German interest rates. But the Irish currency remained around 101p against sterling, despite general falls in the British currency.

The falls against the D-mark mean the pound is now back well within its notional 2.25 per cent band against the D-mark.

The latest moves are likely to be welcomed by the Central Bank. It is thought to be anxious that the currency isn't seen to deviate too far from the core European currencies.

The continuing low level against sterling - the pound traded as high as 104p sterling in recent months - will be welcomed by exporters.

Mr John Beggs, chief economist at AIB, said low volumes in the Irish foreign exchange market contributed to the pound's lacklustre performance. Expected corporate buying also failed to materialise.

According to Mr Beggs, most corporates have already taken advantage of sterling's latest bout of weakness to cover their requirements for the next few months - while others are waiting in the hope that the pound falls back nearer to parity.

He added that sterling and the dollar were likely to regain some ground against the D-mark, which would leave the pound in an unchanged position.

Over the next month, Mr Beggs said the pound would remain between 100.5p and 101.5p against the British currency. Sterling was likely to strengthen on renewed hopes of an interest rate rise while the D-mark would weaken if there was a renewed bout of convergence trading following the Dublin Ecofin summit in December, he said.

The D-mark benefitted over the past couple of days after the Bundesbank's chief economist, Mr Otmar Issing, indicated that the cycle of monetary loosening in Germany had come to an end and that rate cuts were no longer needed in the light of the recent uptrend in the German economy.

"That is simply a restatement of current policy," Mr Beggs said. "German rates will remain low and D-mark weakness will be reasserted over the next couple of months.

He added the recent weak retail sales figures in Britain were not definitive. "It is a very erratic figure; we will see further evidence of the British economy growing strongly.

Nevertheless, he expected sterling to weaken in the New Year as the British general election loomed and the market was disappointed at the likely failure of the authorities to raise interest rates. "At that stage the pound will recover to around 102p to 103p," he said.

As a result, Mr Beggs said the current bout of pound weakness should not have inflationary implications.