Dollar likely to plunge further after G7 talks
Sunday 23 April 1995
Sterling is likely to be dragged down further in the dollar's wake, despite the likelihood of an interest rate rise next month.
Although the Japanese and the French are calling for government intervention to halt the currency turmoil, none of the other leading industrial nations is in favour of the idea. Both the US and Germany have said they would not support a system of intervention similar to the Plaza Louvre Accords of the 1980s.
The effectiveness of a support agreement had already been undermined by uncoordinated attempts by governments to manipulate currencies over the last few weeks, analysts said. Moreover, the US government appears content to let the dollar fall, boosting its exports particularly to Japan.
The dollar rose slightly against the yen at the end of last week, closing at Y82.88 on Friday, as the markets took profits ahead of G7. Dealers did not believe, however, that this marked an end to dollar weakness, as the flight to harder currencies continued.
"The market will have every incentive to renew its selling of the dollar and its buying of yen and marks," said Neil MacKinnon, chief economist at Citibank. The dollar has already lost more than 15 per cent of its value against the yen so far this year.
Sterling, which traditionally follows the dollar, is also likely to fall against other European currencies. It closed last week at $1.6082 but has fallen by 5 per cent against a basket of leading currencies since the start of this year. Some analysts expect it to drop to around DM2.00 by autumn, against DM2.20 last week.
The growing likelihood that Kenneth Clarke, the Chancellor, will raise interest rates in the next few weeks is failing to attract investors back to sterling. Publication of last month's meeting between Eddie George, Governor of the Bank of England, and Mr Clarke showed that the authorities now regard the exchange rate as a policy issue.
"An interest rate rise will do nothing to prop up the pound," said Adam Cole, economist at James Capel. "It is needed simply to offset the impact on inflation of sterling's fall so far." Base rates are likely to rise from 6.75 to 7.25 per cent in early May, he said.
The pound was not helped last week by a string of adverse figures suggesting that economic recovery is faltering. Further gloomy news is expected from the Confederation of British Industry's Quarterly Trends Survey on Tuesday.
The French franc may also come under attack next week following the results of the first round of the presidential election on Sunday. The leader is likely to be Jacques Chirac, the right- wing candidate who, the currency markets believe, is less keen to support a strong franc than other candidates.
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