Kenneth Clarke, the Chancellor, enjoyed a temporary reprieve yesterday as foreign exchange dealers turned their attention to the dollar and the franc. The expected sell-off of the pound, following the surprise decision to peg interest rates last week, failed to materialise as bears homed in on the US and French currencies.
The dollar fell in the wake of the weekend collapse of the US-Japan car trade talks. The French franc also lost early gains following Jacques Chirac's victory in the presidential elections on Sunday.
London markets were closed for the VE Day celebrations but the pound, which was quoted in New York at $1.6048 and DM2.1915, is still expected to face further difficulties this week if Thursday's Bank of England inflation report suggests that government targets are likely to be breached.
The dollar opened lower in New York, reflecting the heightened trade tensions with Japan.The US currency was further undermined by comments from senior Bundesbank officials. Its president, Hans Tietmeyer, was quoted as saying that the only way to reverse the decline would be if Washington acted to boost savings and cut the deficit. Johann Wilhelm Gaddum, deputy president, said that intervention on the foreign exchange markets would be ineffective in stemming the dollar's slide.
The dollar opened in the US at 83.35 yen, down from Friday's US close of 83.94 yen, before falling further to 83.04 yen. It slid to DM1.3640 from DM1.3735. In Europe, the dollar was quoted at DM1.3640 compared with Friday's DM1.3690 and 82.90 yen against 84 yen on Friday.
The fall was less than some were expecting, given the bad news on trade and Friday's announcement of a 9,000 drop in US non-farm payrolls in April. The jobs figure has been taken, along with other recent evidence, to signal a slowing in the US economy, reducing the chances of an early raising of interest rates by the Federal Reserve.
One dealer said: "Dollar-yen has done as well as could be expected under the circumstances." He, and other dealers, noted that the closure of the London market made it difficult to gauge sentiment. "Overall the fundamental picture for the dollar hasn't changed," he said.
In thin trading in Paris, where markets were also closed for the VE Day, the franc firmed to 3.5465 against the mark, up from 3.5720 on Friday. Early euphoria following the election of JacquesChirac saw the French currency hit a 10-day high of 3.5350, but the enthusiasm turned to caution yesterday as markets questioned his commitment to the decade-old "strong- franc" policy in the face of massive unemployment.
The franc remained uncomfortably close to its all-time low of 3.5880, as dealers waited to hear details of the new administration's policies. Investors fear that, under Mr Chirac, the franc-mark link and commitment to European monetary union could be in jeopardy. If, as is widely expected, Mr Chirac appoints the pro-European Foreign Minister, Alain Juppe, as Prime Minister, the markets' worries will be soothed.
Mr Juppe said last week the franc was at its "right level" and that it was up to the Bank of France to defend it in order that a single European currency could be created as soon as possible.
Mr Tietmeyer, speaking after a meeting of the Basle-based G10 group of central bankers, said he saw no simple solution for stabilising exchange rates. But credibility was an important element of monetary policy and he welcomed Mr Chirac's commitment to price stability and to a stable franc.