Currencies

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The Independent Online
THE POUND may extend recent gains against the German mark in the coming days, as concern mounts about Russia's ability to pay its debts to Germany, which is Russia's biggest creditor.

The pound rose 6 pfennigs against the mark last week, to its highest since early July. Yet analysts said it will not rise more than 3 or 4 more pfennigs, as recent reports on manufacturing and trade showed that the British economy is slowing, and suggested that interest rates will now rise any more. Indeed, they may fall.

The pound's decline in recent weeks "has been temporarily halted by events in Russia", said Stephen Hannah, the director of research at IBJ International. "But we're still in a bear market [for the pound]," he added.

While the pound could rise to DM3.00, "it'll struggle to get beyond it, as people start to think about interest rates again".

The pound fell on Friday, for the first time in nine days, to DM2.9612, from DM2.9708 late on Thursday. Against the dollar, it rose to 1.6687, from 1.6500.

Having lost more than $117bn on Russian securities this year as that country's stock market crashed, its currency tumbled and it defaulted on debt, investors are wary of high-risk assets and are seeking safer investments.

With interest rates higher than in any other developed European economy, the UK is a haven for investment until market turmoil ends, analysts said.

The UK's benchmark overnight lending rate is 7.5 per cent, compared with 5.50 per cent in the US and 3.30 per cent in Germany and France.

The Bank of England's Monetary Policy Committee next considers interest rates when it meets on 9 and 10 September. It has raised rates six times since May 1997, to slow economic growth and keep inflation in check.

While growth is slowing, the inflation rate hasn't yet eased enough for a reduction in rates, analysts said.

"It'll be some time before rates start to fall," said Derek Halpenny, a currency economist at Bank of Tokyo-Mitsubishi.

Although inflation slowed to 2.6 per cent last month - close to the Bank of England's 2.5 per cent target - the central bank remains concerned that pressure for higher wages may push inflation higher. It forecast a temporary increase in inflation earlier this month.

"The big hit taken by commercial banks and hedge funds on Russia has put a hole in their balance sheets, and they're trying to trade their way out," said Mike Wallace, who manages European currency analysis at Standard & Poor's MMS International.

The dollar suffered its worst decline in 15 months against the mark and pared gains against the yen, as US.stocks fell amid concern that Russia's financial crisis will spread to other emerging markets.

The dollar fell to DM1.7647, or 1.9 per cent, from 1.7988 yesterday in New York, its biggest decline since 20 May, 1997. The US currency rose to Y142.35, down from as high as Y144.25 in earlier trading, though up from Y141.99 on Thursday.

"It's following the Dow," said Simon Fowles, a trader at Wells Fargo Bank, in San Francisco. "The Dow goes down, the dollar goes down."

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