Pound gains as sterling loses to the deutschmark

THE pound has gained against sterling, trading as high as 103p, as the British currency lost ground against the deutschmark. Buying from Irish corporations also boosted the currency, analysts said.

Traders expect the pound to continue a slow climb towards 104p if sterling continues to fill against the deutschmark.

Mr Eoin Fahy, economist at Ulster Bank, said Irish corporations were taking advantage of the pound trading below 103p to buy the currency, thereby pushing it higher.

There is a feeling that is quite an attractive rate," he said. "Many corporations feel they may not see it again.

"There is genuine Irish corporate demand when the pound is below 103p," he said. "After that, any upward pressure will come from external factors and will depend on how sterling moves against the deutschmark."

Mr Malcolm Barr, international economist at Chemical Bank, said sterling's decline had nothing to do with the bus bomb in London on Sunday, despite several commentators pointing to this. "The problem is the dollar is weak and the deutschmark is strong. That is always unhelpful for sterling," he said.

The early elections announced in Italy on Friday have persuaded many investors to bail out and buy deutschmarks. In addition, the fall out from the Scott Report in Britain last week is hurting sterling.

Sterling initially reacted well to the report after dealers believed it did not badly damage the Tories. However, with two Tory MPs threatening to resign, it now looks as if it may have more far reaching implications. The defections would reduce the already wafer thin majority of the Prime Minister, Mr John Major, to two MPs.

But Mr Barr said it is really the weaker dollar which is hitting sterling as it tends to move in line with the US currency. "A lot of people bought the dollar so far this year on a wave of general optimism," said Mr Barr. "They expected it to rise significantly against the deutschmark and the yen. But they have been waiting a long time for a serious move and have now started to sell, causing the dollar to fall."

Mr Barr expects sterling to fall to $1.4275 and then to below $1.40. On a three month view, that would put sterling as low as 2.1680 deutschmarks, although in the short term it will trade around 2.2128, he said.

Sterling at around 2.20 marks would push the Irish pound up to around 193.5p, said Mr Jim O'Leary, chief economist at Davy stockbrokers.

"There is a clear tendency for the pound to appreciate against sterling when sterling falls against the deutschmark," Mr O'Leary said.

Ulster Bank's Mr Fahy said a sharp fall in sterling would "drastically" lower the value of the pound in the ERM. A sterling move to 2.17 deutschmarks would put the pound at such a weak level against the mark that the Central Bank would have to apply upward pressure, he said.

Mr Fahy believes that such a move could send the pound above 104p. It could go over 105p if it were to happen over three months, he added.

A quicker move of over three to four weeks would make the markets nervous and the pound would be unlikely to breach 105p, he said.

Meanwhile, interest rate speculation has continued. None of the major institutions followed National Irish Bank's and TSB's lead in cutting rates for borrowers. "We are keeping the situation under review" was all most institutions would say.

The wholesale rate, which is generally followed by the banks and building societies, has continued to trade around 5 per cent. This is seen as a key level allowing rate cuts. However, Mr Vincent Dack, head of treasury and capital markets at BNP in Dublin, said the Central Bank had intervened recently to keep the rate from trading below 5 per cent.