THE pound has fallen to below 95p against sterling, its lowest level in over three years, as sterling strengthens on the international currency markets.
The renewed strength of sterling, which reached a new high yesterday against the German mark, poses a dilemma for the Government and the Central Bank. This is because the strength of sterling is pulling the pound higher in the ERM grid, at a time when policy-makers here want to see it weakening against other European currencies.
The Irish authorities seem keen to see the pound fall against the mark over the coming months. This would provide a welcome boost to exporters to the Continent and farmers who have complained that their incomes have dropped dramatically because of the pound's strength against the ERM currencies. Crucially, it would also make it easier to manage the transition to monetary union.
Mr Austin Hughes, economist at Irish Intercontinental Bank, said suspicions had been aroused over the last couple of weeks that exchange rate policy had undergone a "significant shift". There is now an official preference for a softer pound, the exact opposite of policy priority last year, he noted.
The move to monetary union is also likely to mean that interest rates will also fall further, but the reduction may not be dramatic and will only begin to become evident towards the end of the year. Monetary union is due to start at the beginning of 1999.
The Government's focus appears to have changed from keeping the pound stable against the average value of our trading partners' currencies - which has effectively kept the pound strong - to allowing it to weaken against other ERM currencies.
The Minister for Finance, Mr Quinn, appeared to give an indication yesterday that he supports a weaker pound in the ERM. He was quoted saying that he is "somewhat concerned" at the strength of the pound.
Sources close to the Minister sought to play down the importance of his remarks, saying he was quoted out of context and is happy with the current position of the pound.