Sterling powers to new high against D-Mark

STERLING continued bits powerful rise on foreign exchange markets yesterday, touching a 52-month high against the D-Mark.

At DM2.7460, it was within 2.2 pfennigs of its 1992 exchange rate mechanism "floor of DM2.7780. The pound was withdrawn from the ERM on September 16th, 1992 when it fell well below its floor level.

Sterling's gain yesterday came largely at the expense of the D-Mark, following last week's news of record German post-war unemployment. Currency traders in London forecast no respite in the short term. They said sterling could go as high as DM2.80.

Against the US dollar, which also gained against the yen and the D-Mark, sterling rose by almost one cent, to $1.6424.

Dealers reported heavy buying from international investors, notably from Swiss and US funds. Mr Don Smith, an economist at HSBC Markets in London, said: "A strong economy equals a strong currency. Compared to the German and Japanese economies, the UK and the US look very attractive."

The pound's strength will give further cause for British Chancellor, Mr Kenneth Clarke, to resist calls from the Bank of England for a rise in interest rates.

Mr Howard Davies, deputy governor of the Bank of England, yesterday hinted the Bank would repeat calls for a rise in rates, but played down its differences with Mr Clarke. "We have been talking about a quarter per cent in the short-term, with perhaps a little more later in the year," he said.

Three UK companies yesterday told investors that sterling's rise was eating into their profits. Allied Domecq, one of the UK's biggest wines and spirits companies, estimated the high exchange rate could cut £20 million off its pre-tax profits.

Reuters, the media group, warned shareholders in a statement accompanying its preliminary results that "the strength of sterling would severely restrict prospects for reported revenue and earnings growth".

Wall Street's overnight performance, when the Dow Jones Industrial Average fell 49 points, contributed to London's hesitant trend. The Dow kicked off in good form at the outset yesterday and closed last night at 6,858.11 up 51.57 points.

Observers said sentiment in London could well take another dent if, as expected, the Bank of England's Quarterly Bulletin and Inflation Report, out today, echoes the recent request from Mr Eddie George, the bank's governor, for a rise in interest rates. Recent reports said the Treasury had joined the chorus calling for higher rates.

The Bank report will be accompanied by unemployment figures for January and underlying average earnings for December and unit wage costs for the December quarter. Tomorrow brings official inflation data for January.

Mr Paul Meggyesi, senior currency economist at Deutsche Morgan Grenfell in London, said sterling's strength and the coming UK election, which must be held by May, made a rate rise unlikely, as it would "fuel a fire" under the pound.