The Spanish devaluation of 8 per cent was the third since the European currency crisis erupted on 16 September last year. Since then, the cumulative fall in the peseta's target rate against the ecu - the composite European currency - is 19 per cent.
This drop exceeds even the collapse of sterling, which at its most extreme point last autumn was nearly 16 per cent below last September's level measured by a trade-weighted basket of currencies. Portugal was also forced to devalue by 6.5 per cent because of its close economic integration with Spain, bringing the overall realignment of the escudo since last September to 12.5 per cent.
Kit Jukes, of Warburg Securities, said: 'There's nobody else left to attack, the system is home free for now.' Spain promised a 1.5 per cent cut in key interest rates today as analysts agreed that both currencies could now survive if the Spanish recession does not deepen significantly.
Worries that Denmark's referendum on the Maastricht treaty on 18 May could deliver a new blow to the ERM have subsided in the wake of polls pointing to a 'yes' vote.
The peseta last night recovered to 75.70 to the mark from a low of 76.80 and against 73.47 on Wednesday, while the escudo, which opened yesterday at 93.20 to the mark, ended at 95 to the mark after the announcement. At one point yesterday, it traded at 98.25 to the mark. But other currencies were largely unaffected, with the French franc remaining stable after the Bank of France cut its leading intervention rate by a quarter of a percentage point to 8 per cent.
Elsewhere financial markets were dominated by a dollars 10 surge in gold prices to a 17-month high of dollars 367 an ounce in London. Soaring gold prices were driven by frantic commodity- fund buying in New York gold futures late on Wednesday. Analysts believe the price can go higher, but technical-chart watchers said that the rally might stumble at about dollars 370, a price not seen since late 1991.
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