Profit-taking comes to rescue pound

The pound's rise on the markets yesterday resulted from two factors. First, large scale profit-taking and second the reemergence of revaluation as an issue.

The US investment house Goldman Sachs bought a further £200 million, following a £150 million order a day earlier, at the same time as a Bundesbank Council member brought the revaluation issue back onto the agenda.

The pound closed at DM2.5310 having traded as high as DM2.5480 up from DM2.5175 on Thursday. At the same time it closed at 84.60p from 84.33p as sterling also remained strong on the day.

The intervention from Bundesbank council member Mr Klaus-Deiter Kuehbacher, came as a surprise. He noted that the pound was the only EU currency to deviate far from its central rate in the Exchange Rate Mechanism. "If necessary the European council can take the opportunity to revalue the Irish pound when bilateral exchange rates with other currencies on January 1st, 1999 are set," he said.

However economists were loath to attribute too much importance to his views. Mr Kevin Daly, economist at Ulster Bank said the upward movement in the pound was a brief overreaction to comments which were already in the public domain.

Mr Colin Hunt, economist at Bank of Ireland, pointed out that Mr Kuehbacher is renowned for his independent thinking and does not necessarily reflect core Bundesbank thinking.

"It was a statement of obvious fact that it could be revalued and the comments certainly do not put pressure on the Minister to revalue this weekend ahead of the meeting of finance ministers on Monday," he noted. "The Minister will continue to adhere to his policy and his lips will remain firmly buttoned."

A spokesman for the Bundesbank also said that Mr Kuehbacher's remarks were purely personal.

Nevertheless, the remarks are likely to cause further volatility in the pound, which will make life awkward for Irish compaines. Mr Austin Hughes, economist at Irish Intercontinental Bank also pointed to Mr Kuehbacher's comment that the future European Central Bank will have to direct itself to the needs of the core countries and not to the "special circumstances" of smaller countries. This may emphasise the need for the pound to enter the euro at the most competitive rate attainable, if, as it appears, there could be clear bias in the ECB's policy towards the needs of "core" economies rather than the broader area, he said.

One of the reasons that the pound rose so rapidly was the size of the Goldman Sachs order and the illiquidity of the Irish market.