CURRENCIES : Pound and dollar up to the mark

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The Independent Online
The pound and the dollar could both climb to new highs against the German mark in the days ahead. After rising steadily last week they paused on Friday, but the conditions appear right for them to break through the resistance they met late in the day.

In the US an employment report showed that 339,000 jobs were added to the economy last month, far more than economists had expected. The robust American economy makes it more likely that the Federal Reserve will raise interest rates soon, if not at the Open Market Committee meeting on 25 March, possibly at the 20 May meeting.

The case for an increase in British rates is not as ironclad as it once was. One reason is the strength of sterling, which is now up almost 5 per cent against the mark since the end of January.

By keeping export prices high, the muscular pound acts as a drag on the economy, making inflation less of a threat - the same purpose served by higher rates. It also makes imports cheaper, pressing domestic businesses to keep prices down.

In any case, if the pound were to weaken enough to revive inflation fears, the chances are that talk of a rate hike would return. And that would cause sterling to start rising again.

More important for the dollar and the pound is the state of the German economy. It is simply not healthy enough for the mark to rally. Although Germany reported last week that fewer people joined the ranks of the jobless in February than expected, the 5,000 who did kept the unemployment rate at 12.2 per cent. Britain's jobless rate, by contrast, is 6.5 per cent, and the US rate is 5.3 per cent.

The Germans themselves see little hope of change. In a survey of 10,000 businessmen, the financial daily Handelsblatt found that nearly a third believed their companies faced economic and financial difficulties.

All of which leaves the dollar and the pound poised to break through the barriers that halted their advance last week: 1.7230 marks to the dollar and 2.778 marks to the pound.

The former is the dollar's high in April 1994 just before it began a slide that wasn't reversed until November 1996, and a key technical level. The latter was sterling's floor rate in the European exchange rate mechanism before the pound was forced out in September 1992 - also a crucial technical level.

"People are worried about taking on the 2.778 level, which is the old ERM floor," said Lee Ferridge, a currency economist at Commerzbank. "Sterling is trading in a volatile range, but the trend is still up and there's no reason to expect a sharp weakening of the pound."

Sterling came close to a breakthrough in overnight trading on Thursday, touching 2.7745 marks before falling back to 2.7498 late on Friday. One reason was weakness against the dollar after the US employment report. The pound slipped to $1.6040 late Friday from $1.6114 on Thursday.

The dollar also neared its breakthrough level, rising to 1.7209 marks on Friday. It stopped short, though, and slipped before rebounding to trade at 1.7188 marks late Friday. "It looks like we will take out that crucial 1.7230 level next week," said Mr Ferridge. Copyright: IOS & Bloomberg