Becalmed pound embarks on a difficult week

THE POUND faces an uncomfortable week in the currency markets after making little progress yesterday in thin trading on the Continent and in the United States. Fears of a hike in UK interest rates are likely to resurface while sterling remains dangerously close to its floor in the exchange rate mechanism.

But while European markets were quiet yesterday, the Tokyo stock market firmed by 0.5 per cent, with the 225-share Nikkei index rising 90 points to 18,061 on the back of the Japanese government's expansionary package announced last week.

In New York, sterling closed at DM2.7880, little changed from the previous close and only one pfennig above its ERM floor of DM2.7780.

With the London currency and stock markets closed, trading was lacklustre. In Paris the pound's early progress against the German currency was almost entirely wiped out. It closed 0.16 pfennig higher at DM2.7889.

Senior Bank of England sources are hoping that the Bundesbank, which meets on Thursday, will signal that German interest rates have reached a peak by shaving money market rates. No immediate change is expected, however, in its two key rates - the Lombard rate and the discount rate.

The dollar fell in New York yesterday, bringing good news for British tourists in the US - but bad news for UK exporters. 'We are flirting with the dollars 2 pound once again,' said one forex trader, pointing to a drop of half a cent to dollars 1.9880.

The dollar closed down more than half a pfennig to DM1.4028, from DM1.4095 on Friday.

The dollar's weakness was influenced by worse-than-expected July data for new home sales. Analysts had expected a small increase for the month, but the numbers showed a drop of 2.6 per cent despite the lowest mortgage rates in 20 years.

The White House yesterday rejected Democratic charges that the dollar's slide was due to a lack of confidence in President George Bush's economic programme and said it did not want the currency to fall further. Marlin Fitzwater, White House spokesman, said: 'The US is not seeking a decline in the dollar and does not believe that a lower dollar is necessary for its export competitiveness.'