Bank of France buying fails to halt franc's slide towards ERM floor: Balladur has to reassure markets after boasting of anchor role

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The Independent Online
THE FRENCH franc closed at a 15- week low yesterday as a second successive day of intervention by the Bank of France failed to prevent the currency falling below the psychological level of Fr3.40 to the mark.

The franc ended the day at Fr3.4007, its lowest since 26 March. The French central bank bought francs for marks at just under Fr3.40, with the Bundesbank also rumoured to be helping.

The franc is now just three centimes from its floor in the European exchange rate mechanism. Days after the French government boasted that the franc was sharing the anchor role in the system, the Prime Minister, Edouard Balladur, had to reassure the markets that every step would be taken to keep the franc in the ERM.

Speculation that France might leave the system, giving it scope to revive the economy with larger interest rate cuts, pushed share prices in Paris slightly higher. The CAC-40 index ended 5.33 points higher at 1,985.7.

A rise in French interest rates is thought unlikely as this would do further harm to the economy, perhaps fuelling speculation that devaluation is inevitable. The incumbent conservative government has cut rates 10 times since coming to power in April.

Recent selling pressure on the franc was intensified on Thursday by a warning from Insee, the French national statistics institute, that the economy could shrink by 1.2 per cent this year and that one in eight of the workforce could be unemployed by the end of the year.

The renewal of tensions within the ERM came as a tonic to the dollar, which enjoyed safe-haven status. The US currency also received an initial boost in early trading from a single large buy order, believed to be from the Abu Dhabi Investment Authority. The dollar closed 1.35 pfennigs up on the day at DM1.7220.

The mark was little affected by an unexpectedly sharp fall in western German retail sales, with the Bundesbank thought unlikely to respond by accelerating rate cuts. Sales fell a real 6.2 per cent in May from a year earlier, suggesting that the momentum in the economy may still be downwards.

The steady fall in consumption provides further ammunition for those economists warning that the sudden euphoria sweeping German financial markets about the first green shoots of recovery is misplaced.

'We continue to get evidence that the fall in real disposable incomes that is pulling consumption down will persist well into 1994. This will be an important factor in prolonging the recession,' said Kermit Schoenholtz, chief economist with Salomon Brothers in London.

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