THE pound has reached new highs against the deutschmark, trading at almost DM2.58 for the first time in more than three years. The Irish currency, which is rising in tandem with sterling, remains at the top of a widening ERM band and is now trading more than 8 per cent higher that the lowest currency in the grid, the French franc.
The franc, meanwhile, faces new uncertainty with a political row brewing in Paris over currency policy.
The pound stayed at just above parity against sterling throughout the day as the British currency continued to benefit from speculation on higher British interest rates and from uncertainty surrounding the French franc.
Sterling's strength pulled the pound through DM2.58 at one stage before it closed at DM2.5765. The Irish currency is now at its highest level against the deutschmark since the 1993 currency crisis and is only a few pfennigs below its pre devaluation level of just above DM2.62. The Irish currency has risen by almost 10 pfennigs against the deutschmark this month.
Meanwhile, further uncertainties on the markets have been caused by signs of tension between the French and German governments on monetary and exchange rate policy. Yesterday Bank of France council member Mr Jean Pierre Gerard called for a weaker franc against the dollar, saying that the Germans' lack of understanding on exchange rate - policy might make it necessary to end the 10 year old central exchange rate in the ERM between the D mark and the franc.
Mr Gerard, a member of the independent central bank's monetary policy council, and believed to be one of a minority in favour of less stringent monetary policy within the bank's inner sanctum, laid out his views in an interview in Le Monde newspaper.
His remarks drew a speedy rebuke from Finance Minister Mr Jean Arthuis who said the Bank of France's job was to preserve price stability and that members of the monetary policy council should keep misgivings to themselves rather than vent them in public.
"Each time the franc depreciates, (interest) rates go up. We want rates to go down," Mr Arthuis said.
Mr Gerard's stark appraisal of German policy came days after similar comments by Mr Paul Marchelli, seen as a minority ally of Mr Gerard [in the bank's council, and declarations in a similar vein by former president Mr Valery Giscard d'Estaing that revived debate over a decade old policy of a strong currency tied to the D mark.
The franc was undermined across the board yesterday following Mr Gerard's controversial remarks. Al weaker exchange rate against the dollar could help to resolve France's economic problems, boosting employment and accelerating growth. To achieve this however, it needs the collusion of the Bundesbank on cutting interest rates in France and Germany.
While such uncertainty grips the currency markets economists believe sterling will continue to be the main beneficiary and could go significantly higher in the coming weeks. The pound will also remain strong against the other European currencies while trading firmly at close to parity with sterling.
On the currency front, AIB group treasury economist Mr John Beggs predicts it will be a difficult month with the market closely watching the outcome of the forthcoming EU summit in Dublin where it is hoped agreement on a stability pact will be reached. The Irish market will also be focusing on domestic inflation, looking for evidence of the impact of a stronger sterling on the price levels in the Irish economy, Mr Beggs adds.
