Dollar bounces back through 100 yen level
Bolstered by the prospect of the G7 meeting of finance ministers in Washington this weekend, the dollar broke back through the 100 yen threshold to close in London at 100.60. The pound also had a good day, ending 0.5 up on its trade-weighted index at 85.2, clocking up gains of a pfennig against the mark and almost a cent against the dollar, compared with Friday's London close. Morning gains by the dollar were helped by a report in the Japanese Mainichi newspaper that finance ministers would agree to let the US dollar rise to 110 yen.
Early dollar firmness against the mark petered out as the market absorbed the outcome of the Valencia summit and the reported remarks of Helmut Kohl about a possible delay to monetary union.
A further stiffening in the German conditions for EMU was made in a speech by Otmar Issing, the Bundesbank's chief economist, in which he called for a new treaty to enforce sanctions against fiscal delinquency on the part of participating nations after a monetary union. Describing the sanctions set out in the Maastricht treaty as "anything but compulsory", Mr Issing said what was at stake was "nothing less than the future stability of the common currency".
"Sterling has perversely been deriving some benefit from the EMU problems," said Neil MacKinnon, currency strategist at Citibank, referring to the market's perception that sterling will not participate in a first step to monetary union. Lee Ferridge of NatWest Markets thought that sterling's strength against the dollar would be short-lived.
The perception that the US National Association of Purchasing Managers' index was weaker than expected had little effect on the foreign exchanges but helped the US bond market, with the 30-year bond rising by over half a point.
The market had been expecting the NAPM index, which gauges the state of US manufacturing, to rebound to above 50 from 46.9 in August. Instead it rose in September to only 48.3, the fourth month running that it has shown softness in manufacturing. The sharpest fall in the components of the index was in inventories.
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