Belgian franc bounces back

Currency watchers are keeping a close eye on the Belgian franc.

Last week, the currency reversed a month-long decline after Guy Spitaels, a Socialist Party leader embroiled in a long-festering bribery scandal, finally stepped down. His resignation eliminated some of the uncertainty surrounding Prime Minister Jean-Luc Dehaene's coalition government and helped lift the franc back up to its central parity against the German mark in the European exchange-rate mechanism for the first time since 3 February.

Steps by the Socialists, part of the four-party coalition, to put their past behind them are "a good sign that finally they are making some moves to clean up the mess", says Wim Melyn, head of strategy at Bacob Bank.

Analysts say the franc's rebound is more than a temporary recovery. Economic fundamentals, too, are supporting the currency.

A report last week showed that Belgian consumer prices dropped 0.12 per cent in February, led by falls in food prices, and rose by just 1.98 per cent in the year - the first time the annual rate has been below 2 per cent since August.

This is good news for Belgian bond holders. So is the franc's recovery itself, which puts an end to speculation that the central bank will be forced to raise short-term interest rates to defend the currency.

And what is good news for bonds - low inflation, the prospect of steady rates, a falling government deficit and a roaring current account surplus - is bound to be good news for the Belgian franc. Copyright: IOS & Bloomberg.