Weakness of pound against sterling good for exports

THE pound fell sharply against sterling yesterday, closing at 102.40p, providing further good news for exporters. However, it hung on to sterling's coattails and rose rapidly against the deutschmark and other European currencies.

Many analysts had expected the pound to move as high as 104p this month but renewed interest in the British currency among US funds has proved them wrong.

Sterling continued to run ahead on international markets as large US hedge funds started buying the British currency in quantity. It reached three month highs against the dollar and a 15 month peak against the deutschmark. The Irish pound rose in its wake and closed at DM2.4220 yesterday from DM2.4140 the day before.

Over the past week the pound has fallen from 103.20p against sterling to 102.40p and has risen from DM2.3960 to DM2.4220.

"This is a good time to exploit sterling's weakness," according to Mr Jim Power, chief economist at Bank of Ireland Treasury. "If anyone has sterling to sell forward they should do it at these levels."

Mr Power added that he expects sterling to give back some of its gains as political concerns come back to the forefront. "Sterling is flavour of the month right now but I think it will prove temporary," he said. Mr Power is still predicting the pound will reach 104p sterling within six months.

Many British strategists expect the currency to make further gains in the short term as there are no signs of the appetite of US funds being appeased. Traders in London said they expect sterling to test as high as DM2.3710 next week from DM2.3610 yesterday and DM2.3539 a day earlier. This could bring the Irish pound back as far as 102p.

However, analysts here warned that the Central Bank is likely to be unhappy at this prospect and would intervene to keep the pound above 102p or even 102.50p.

"Weak sterling has been a big factor in keeping inflation under control," said Dr Dan McLaughlin, chief economist at Riada Stockbrokers. "I wouldn't be surprised if we saw intervention at that level. The Central Bank has already been a net buyer of the currency so far this year.

Sterling continued to benefit from the market's belief in the British economy's ability to combine growth with contained inflation. That optimism was triggered by the publication on Thursday of a positive report on the UK by the OECD (Organisation for Economic Co-operation and Development) and by British foreign trade figures for March, showing a marked drop in the deficit.

Other analysts said doubts about this year's surge in optimism about monetary union in Europe have helped sterling make up the ground it lost when other European units rose recently. "There is a strong possibility that Maastricht will be watered down. That would devalue the mark and sterling is gaining as a result," Mr Power explained.

The pound stormed ahead against the deutschmark, after reaching 18 month highs earlier in the week.

A Bundesbank council member, Mr Klaus Dieter Kuehbacher, said the Bundesbank would wait for further developments in M3 money supply before making any changes in its interest rate policy.