Sterling weakens in advance of Brown's first budget

STERLING has turned weaker with investors selling the currency ahead of today's British budget amid growing concerns that the new Chancellor of the Exchequer, Mr Gordon Brown, will introduce restrictive measures in a tight fiscal budget.

On the back of sterling's set-back yesterday, the pound went marginally stronger, gaining a penny to close at just over 91p. It remained virtually unchanged against the deutschmark, however, closing at DM2.64.

The markets will be watching Mr Brown's first budget closely today, for clues about the future direction of British monetary policy. Many investors decided yesterday to take profits on sterling ahead of any new fiscal measures, sending the currency lower.

Sterling's woes were further compounded by new figures which, for the first time, suggested that sterling's recent strength against the major currencies had dampened the demand for British exports.

While the focus in London was firmly on the forthcoming budget, the Dublin market continued to be awash with speculation that the Government may seek a revaluation of the pound in the ERM over the coming months. The story, which has been doing the rounds for a number of days now, was seen to be the main factor in keeping foreign investors out of the market. Foreign exchange traders said the market was particularly quiet yesterday.

Meanwhile, the Irish Small and Medium Enterprise Association (ISME) urged the Minister for Finance, Mr McCreevy, to resist such a move, which it warns would make the economy uncompetitive. It also called for a debate and referendum on Ireland's first-phase entry into European Monetary Union and the inclusion of the Maastricht criteria in the Constitution.

Some market analysts suggested that, while the speculation on a revaluation may be unfounded, the rumours themselves were managing to underpin the pound at current levels against the deutschmark.

Dr Dan MacLaughlin, senior economist at Riada Stockbrokers, said the speculation had effectively created a floor for the pound keeping it trading at around DM2.64. "Previously, when the pound moved over DM2.61, it was sold." Yesterday there was no significant foreign-based activity in the Irish market. If someone is believing it, the rumour could stop the pound from falling below these levels for a while," said Dr MacLaughlin.

The main argument for a revaluation of the pound's central rate, the rate at which it would join EMU, is that it would limit speculation against the currency while keeping a lid on inflation.

On the downside, however, a revaluation would badly hurt exporters while also affecting EU payments to the farming sector. Irish Intercontinental Bank economist, Mr Austin Hughes, took the view yesterday that there was less than a 50 per cent chance of the Government opting to revalue the pound.

He also warned that, as a strategy, a revaluation would be insufficient to stabilise the overall value of the pound because the currencies of Ireland's key trading partners, such as Britain and the US, would continue to fluctuate.