As the pound has soared past its old level in the exchange rate mechanism, it has eliminated the losses the Bank made when it tried and failed to support the currency by buying it on the foreign exchanges in the autumn of 1992, in the run-up to "Black Wednesday". The Bank is thought to have spent about pounds 10bn on that intervention, making a paper loss of up to pounds 2bn.
The losses on the intervention, which failed to keep sterling in the ERM, have now turned into a profit of around pounds 1bn due to the appreciation of the pound and interest earnings during the past five years.
The pound's exchange rate against the German mark fell from DM2.78 in September 1992 to a low of DM2.18 in November 1995. Last night it stood near its highest for seven years at DM3.02.
However, the pound's strength on the foreign exchanges led to fresh predictions yesterday of massive job losses in manufacturing. There were also warnings from currency traders that the Bank of England would soon have to intervene to sell sterling and prevent the pound from rising any further.
Professor Andrew Sentance of the London Business School, speaking to the Foundation for Manufacturing and Industry last night, said the current strength of the exchange rate threatened the loss of 100,000 jobs in manufacturing.
"We have not seen anything like an appreciation on this scale in one year before," he said.
He predicted that the shake-out in industry would not approach the early 1980s recession in its scale, but there would nevertheless be big job cuts. "Manufacturing is not grinding into reverse, but this estimate of potential job losses is quite conservative."
Gloom about industry's prospects if the exchange rate stays strong enough to bite into exports is spreading.
Kenneth Clarke, former Chancellor of the Exchequer, said yesterday: "If we are not careful, this will wipe out our manufacturing industry."
The alarm was not universal. Kevin Gardiner, UK economist at investment bank Morgan Stanley, said: "The strong pound is as much an effect as a cause. The home market, which is still the biggest, is expanding strongly enough for manufacturing to continue to grow."
However, the mood in the foreign currency markets was becoming a matter for concern, some analysts said. Michael Lewis at Deutsche Morgan Grenfell said it could only be a matter of time before the Bank of England had to sell pounds to control the exchange rate.
"It is becoming increasingly disorderly, and a lot of hot money is going into sterling. The markets will continue to test the resolve of the central banks," he said.
The excitement is not confined to the pound, but rather reflects the general weakness of the German currency. The Bank of Italy yesterday intervened in the markets on a small scale to sell lire and buy marks.
Meanwhile, the dollar has been strengthening against a range of other currencies, particularly the mark and yen. The health of the US economy was confirmed by new figures yesterday showing that retail sales increased by 0.5 per cent, more than expected, in June.
The currency markets have become convinced that there is nothing to lose from bidding up the pound and dollar and bidding down the mark. The Bank of England and Federal Reserve are expected to raise interest rates during the next few months, while the Bundesbank is thought unlikely to increase key interest rates until the German economy shows more signs of life.
The pound ended yesterday almost unchanged at DM3.02. Its index against a range of other currencies was down 0.4 at 105.1. It has risen by 24 per cent in value during the past 12 months.Reuse content