Commentary: The Bundesbank is our best bet

The pound touched dollars 2 at yesterday's close and may still go higher, but the nice round number disguises an exchange rate that has become a sideshow. The big battle on the foreign exchanges continues to be between a US dollar offering a mere 3 1/2 per cent interest for three-month deposits and a German mark offering 9 3/4 per cent. With most European currencies hitched uncomfortably to the mark, they too are rising against the dollar.

The pound fell against the mark by half a pfennig, which leaves barely half a pfennig before hitting the absolute floor permitted by the current central rate. It is therefore too early to rule out a rise in interest rates. But the professionals are more relaxed than they were last week: the one-month interbank rate eased, and there is therefore no money market pressure for a bank base rate rise.

The most obvious danger for sterling continues to be in the dollar-mark relationship. With the dollar through another support level at DM1.40, the currency could easily continue to drift. Already, the market is betraying tell-tale signs of bearishness by interpreting every indicator in gloomy fashion. Short of some sign of a change in interest-rate policy on either side of the Atlantic, it is hard to see the dollar turning round.

From Washington, precious little is likely before the presidential election in November. Even though the Federal Reserve is independent, it is also keen to stay out of the firing line. The only real hope lies in Frankfurt, but there are many sound domestic reasons why the Bundesbank is reluctant to cut rates, including the start of the pay round. The best hope is a signal that German interest rates have peaked by means of cutting money market interest rates rather than the Lombard or the Discount. The result of this morning's tender will give a clue about whether the Bundesbank is developing international antennae too.