Renewed waves of selling of the dollar overwhelmed the impact of the Bundesbank's cut in interest rates on Thursday, reversing the gains made by the London stock market and pushing the pound back against the mark. The flight into hard currencies brought to an end a turbulent week on the exchanges as the dollar plunged to new lows against the yen and mark.
The pound's weakness will renew pressure on the Bank of England to raise interest rates at next week's meeting between the Chancellor, Kenneth Clarke, and Eddie George, Governor of the Bank of England.
Since the Bank's last increase at the beginning of February, sterling has fallen on a trade-weighted basis by 3.5 per cent . On conventional calculations, the resulting rise in import prices is more than enough to offset the Bank's attempt to tighten policy.
Stronger-than-expected consumer credit figures released yesterday appeared to intensify the pressure for a rise in rates. Consumer credit rose by £601m in February, equivalent to an annual rate of 12 per cent.
However, the latest figures for total net lending on dwellings revealed the continuing weakness of the housing market, something that is likely to deter an imminent increase in rates.
Some analysts, such as Jonathan Loynes of HSBC Greenwell, argue the continued buoyancy of consumer credit indicates an underlying weakness in demand as retailers resort to promotional cheap finance deals to prop flagging sales.
One argument that may be used at the meeting between the Chancellor and the Governor is the ineffectiveness of the Bundesbank's cut in interest rates in arresting the mark's rise. With sterling caught in the slipstream of dollar weakness, a rise in rates seems hardly likely to bring anything other than equally short-lived respite to the pound.
The dollar first came under assault in overnight trading in the Far East as heavy sales drove it down to new lows against the yen, despite a sharp easing in Japanese overnight call rates from over 2 per cent to 1.75 per cent. The strength of the yen depressed the stock market and the Nikkei Average closed down 372 at 16,140. The dollar proved no more resilient during the day, putting renewed pressure on weaker European currencies such as the Spanish peseta.
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