Pound forced back by record sterling

A renewed burst from sterling which gained almost four pfennigs against the German D Mark yesterday to break through its former European exchange rate mechanism floor and reach its highest level since Black Wednesday in 1992, has pushed the pound down towards 95p sterling, its lowest level for over three years.

Meanwhile, the strength of the British currency and rising confidence in monetary union have combined to send the pound up sharply against the deutschmark.

By the close of trading yesterday, the pound was over a pfennig stronger on DM2.6530, but it had fallen by around 0.7p to 95.37p sterling. The renewed strength of, the pound within the ERM resulted in the pound moving to 10.5 per cent above the weakest currency, the French franc, compared to 9.5 per cent above the franc at last Friday's close.

The pound is still, however, well off the 12 per cent level it reached within the grid earlier this year.

At the time this had fuelled speculation that the Central Bank might be forced to lower interest rates in an attempt to bring the pound lower within the grid.

The Irish authorities will now hope that sterling has not resumed a sustained upward trend on markets which could pull the pound still higher.

"This has all been driven by the weekend summit, and the market has taken the view that EMU is back on track," said Bank of Ireland Treasury chief economist, Mr Jim Power.

Sterling and the US dollar were rising strongly, largely on expectations of higher interest rates on both sides of the Atlantic.

The markets believe that US rates are set to rise again and that British rates will rise after the election. Some dealers also attributed dollar strength to some selling of the deutschmark due to rising confidence that ERM would begin on schedule.

While German government spokesmen and Bundesbank president, Mr Hans Tietmeyer, played down reports that they were prepared to tinker with the Maastricht deficit criteria to allow Germany to qualify, speculation to this effect after the weekend meeting of EU finance ministers has added to confidence about the project proceeding on time.

Sterling gained almost three pfennigs against the mark to close on DM2.7830, its highest level since September, 1992.

"Sterling is moving up in the slipstream of the dollar which is being partly driven by Japanese investors taking advantage of the interest rate differential between the US and Japan," said one dealer. The dollar yesterday reached a four year high against the Japanese currency.

Until the most recent sets of consumer price figures showed inflation remaining at a low level, the Central Bank had faced the dilemma of how to cap the rise of the pound within the ERM without fuelling inflation.

A rise in interest rates would be the most obvious way of curbing inflation but this would have simply pushed the pound higher within the ERM as investors moved to take the higher rates.

There was no evidence yesterday of the Central Bank taking any action to try and curb the sterling driven rise of the pound within the ERM.