Brady puts skids under dollar and sterling

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The Independent Online
US Treasury Secretary Nicholas Brady was responsible for a rollercoaster ride for the dollar and sterling yesterday when he first said that he was happy to see the US currency fall below DM1.50. He was then forced to disclaim reports that he was talking the dollar down.

Sterling's fall took it outside the limits within which it will have to trade when the Chancellor adopts the 2.25 per cent 'narrow bands' of the European exchange rate mechanism. Norman Lamont has never cut interest rates with the pound so low in the ERM.

Sterling's weakness scuppered market hopes of an early cut in UK interest rates and helped to depress London share prices. The stock market was also disconcerted by a sharp fall on Wall Street. The FT-SE index of 100 leading company shares fell 21.1 points to close at 2,472.6.

Mr Brady's claim that he was unconcerned if the dollar fell below DM1.50 was promptly put to the test - the dollar fell steadily through the morning, reaching a low of around DM1.4760.

The pound was dragged in the dollar's wake, but managed briefly to climb above dollars 1.94, from Tuesday's close of dollars 1.9255. Against the mark, the pound rapidly fell below DM2.8840, its putative 'narrow band' floor. Sterling - like the Spanish peseta and the Portuguese escudo - is currently allowed to stray 6 per cent from its central rate.

A weaker escudo also lowered the pound's so-called 'effective' floor in the ERM, defined by its distance from the system's strongest currency. This gave the pound further scope to fall, helping it to dip below DM2.87.

Traders said they suspected that the Bank of England had instructed a clearing bank to buy sterling on its behalf, but thought the Bank had quickly given up when it had seen the size of the selling orders.

The mood changed sharply during the afternoon, again prompted by Mr Brady. He denied reports that the US was trying to punish Europe for failing to make concessions on the liberalisation of trade in agricultural goods. 'We are not seeking to depreciate the dollar', he said.

This was a signal for profit-taking on the mark and speculative dollar buying by US fund managers. Both the dollar and pound recovered during the afternoon, with sterling losing some ground against the US currency. The pound closed at DM2.8722, down 1.25 pfennigs on the day. The dollar ended a third of a pfennig weaker on the day at DM1.4950.

The pound was also helped by John Major and Mr Lamont ruling out a devaluation, while Michael Heseltine told the Commons that high British interest rates were a signal that inflation needed to be brought down further.

George Magnus, economist at SG Warburg, said: 'The US administration is bankrupt in terms of economic policy. Depreciation of the dollar is the only escape valve.' Mr Magnus added that the dollar could head towards its record low of DM1.4430 and this would exacerbate strains in the ERM.