STERLING has suddenly reversed direction on the foreign exchange markets, fall sharply and allowing the Central Bank to push the pound down in the ERM band.
Sterling lost ground in European markets yesterday after a big sell off in Asia overnight. It lost over three pfennigs against the deutschmark, closing at just over DM2.67. The British currency's fall follows months of gains as the prospect of rising British interest rates sucked speculative cash into the currency. It was hit by a large sell off triggered by a drop in retail sales and waves of taking.
Sterling's fall brought the Irish currency back above 98p sterling and also led to it falling back in the ERM band, a combination which will please the Central Bank.
The Central Bank took advantage of the sterling's fall by selling large amounts of pounds against the deutschmark.
It managed to send the pound down by over a pfennig. The Irish currency closed at 2.6233 marks from 2.6469 a day earlier. The selling also limited the gains the pound would have made against sterling, although it rose to 98.25p from 97.44p.
One reason the Bank sold the pound was to bring the currency lower in the ERM grid. The pound had risen so far at the top of the grid that it was trading over 10 per cent above the lowest currency - the upper limit under Maastricht rules is 15 per cent. Last night it closed at 9.3 per cent above the weakest currency, compared to 10.4 per cent the previous evening.
A further fall in sterling would be welcome news for the Central Bank on two fronts. First it would help to bring the currency closer to the core EU currencies - the French franc and the deutschmark - in the ERM band. And second, a higher pound value against sterling would also help guard against inflation. There have been some fears that the fall of the pound against sterling would soon start to fuel inflationary pressures by pushing up import prices.
Last night market opinion was divided on whether the reversal in sterling's fortunes would be temporary. Weak retail sales figure undermined hopes of an early rise in British interest rates, which had supported sterling. Close attention will now be paid to future British economic data.
Before Wednesday's fall the British currency had soared by more than 40 pfennigs against the deutschmark since last August. This led to a sharp rise in the value of the pound in the ERM as the Irish currency was dragged up in sterling's wake.
Political considerations play an important part in interest rate rise "speculation as the British government must hold elections by May and may be reluctant to raise rates before then, analysts said.
At a monetary meeting last week's between Bank of England governor, Mr Eddie George and Chancellor of the Exchequer Mr Kenneth Clarke, Mr Clarke held rates steady, citing the deflationary impact of a strong pound.
Yesterday's fall in the value of the pound against the deutschmark will be welcomed by many companies exporting to Continental Europe, who have been squeezed by the pound's strength. Mr Colum MacDonnell, chief executive of the Irish Exporters Association, warned that many firms are facing short working weeks, others are facing job losses and in at least one case a factory closure is possible. "We are being punished for being good Europeans," said Mr MacDonnell.
While there were complaints from exporting industry when the pound rose against sterling last year, a different group of companies are affected by the rise in the ERM band.
