The Treasury denied the rumour, and investors later bought sterling at the lower level. But its exchange rate against the German mark ended nearly 4 pfennigs lower at just under DM2.77 last night.
"The Government has no intention of joining the ERM," a Treasury official said firmly.
Some City conspiracy theorists said the unattributed rumour was the ideal way of getting the pound down from its recent, uncomfortable heights. Others said that after this week's surprise announcement about the Bank of England's independence anything was possible.
But Neil MacKinnon, chief economist at Citibank, said: "No new Chancellor wants to be faced with a slide in the currency in his first week in office." He pointed out that the fall yesterday was exaggerated by the fact that most of it took place overnight in New York, where trading in sterling is light.
Alison Cottrell, an analyst at Paine Webber, said: "This kind of speculation was to be expected. The pound is the last European currency where there is any scope for it."
Some analysts said that it was plausible that the new Government would want to take Britain back into the exchange rate mechanism, in the new spirit of co-operation with the EU.
But they saw the British presidency of the European Union in the first half of 1998 as the more likely occasion, especially as the Chancellor has all but ruled out British membership of the single currency in the first wave.
Although the ERM rumour was the focus of attention, the pound's welcome weakness yesterday was probably due at least as much to a decline in the US dollar. It dived against the yen following strong indications that the Japanese authorities will not let the yen fall any further.
The US currency dropped below 124 for the first time in a month, compared with its 1 May high of 127.50.
Eisuke Sakakibara, a Ministry of Finance official, said yesterday he could foresee the dollar falling to 103. It is very unusual for Japanese officials to make such an explicit comment.
"Mr Sakakibara's willingness to depart from the conventions is an indication of how serious the Japanese authorities now are," said Stephen Lewis, chief economist at London Bond Broking.Reuse content