City fears rising pound

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The Independent Online
WIDESPREAD City forecasts of a rising pound have alarmed economists, who fear it could jeopardise an export-led recovery, writes Peter Torday.

Some analysts predict that sterling is set to climb near to its former floor in the Exchange Rate Mechanism - DM2.78 - lifted by the strengthening UK recovery, a weaker mark and the Treasury's decision to postpone a further cut in base rates.

On Friday, the pound ended at DM2.6116, a gain of almost 3 pfennigs on the week. But it is almost 30 pfennigs above the low-point hit following Black Wednesday, and some analysts fear that sterling could soon top DM2.70.

They worry that British industry will forfeit its gains in competitiveness following sterling's ejection from the ERM 16 months ago. Hopes for an export-led recovery could fade, and growth prospects may be hurt if cheaper imports are sucked in by rising consumption.

The stronger dollar has helped to limit sterling's gain in value on a trade-weighted basis. On Friday, the pound closed at 82.7 per cent of its 1985 value when measured against a basket of currencies, compared with 90.9 per cent on Black Wednesday and a low of 76.8 on average during February.

George Magnus, at Warburg Securities, said: 'We do not rule out a move to the foothills of the old ERM floor.'

Roger Bootle, chief economist of Midland Global Markets, added that there was a 'significant chance' the markets would take sterling higher still.

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