Sunday 23 August 1998
The gains will probably be capped, however, as reports on trade and manufacturing confirm the British economy is slowing and that interest rates won't rise any more, but might fall.
"There are limits to the sterling 'safe haven' story," said Stephen Hannah, director of research at IBJ International.
While the pound could rise to DM3, "it won't go beyond that because the fundamental position is not sterling-positive, it's sterling-negative, and that will be re-emphasised in this week's data," Hannah said.
The pound rose on Friday to 2.9416 marks from 2.9311 late Thursday. Against the dollar, it was little changed at $1.6313 from $1.6331.
Britain's June trade balance will be published this week. The Confederation of British Industry, the employers' organisation, will also release the results of its monthly survey on manufacturing confidence.
British exports plunged from April through to July at the fastest rate in 12 years, while domestic orders fell for the first time in more than two years, the CBI said in its last report.
Britain had a pounds 1.86bn trade deficit in May.
The pound rose more than three pfennig last week after Russia allowed the rouble to depreciate and said it would restructure $40bn in Treasury debt. Members of the lower house of parliament, or Duma, on Friday called for the impeachment of President Boris Yeltsin.
Bad news in Russia prompts investors to sell marks because Germany is Russia's biggest creditor, and a weaker rouble will make it harder for Russia to pay its debts.
Sterling also got a boost last week from reports on spending and money supply, which dampened speculation the Bank of England would cut interest rates before the end of the year.
"It would be nice if the rate hikes are over, but there's still a risk in the UK that we could see one more in the cycle," said Gerry Celaya, a senior currency analyst at American Express Bank.
The government said Wednesday that retail sales rose 0.9 per cent in July, beating economists' forecast for a 0.4 per cent rise.
On Thursday, the central bank said the M4 measure of money supply rose 1.5 per cent last month, three times what economists had forecast.
The reports raised speculation that inflation in the UK may accelerate and prompt a rise in interest rates. The Bank of England will next consider interest rates on 9 and 10 September when its Monetary Policy Committee meets.
In New York, the dollar surged against the yen, rising for the first time in five days, on signs Japan's banking crisis is deepening, keeping investors wary of the country's financial assets.
Concerns about banks mounted on Friday after Okura, a Tokyo-based trading company with strong links to Fuji Bank, said it was seeking protection from creditors. It's Japan's third largest bankruptcy this year.
"Problems in Japan are bringing down the yen," said Rick Zauderer at Friedberg Commodity Management, adding the dollar could rise above 150 this year.
The dollar soared to 145.17 from 142.90 on Thursday, its biggest rise in seven weeks. The dollar was little changed against the mark at DM1.797.
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