The G7's move came as the dollar fell 0.4 pfennigs against the mark to an 18-month low of DM1.4502. The dollar was trading around its all-time low of DM1.4475 after the London market had officially closed.
The mark was boosted by continued fears that the Bundesbank may raise its key Lombard interest rate and worries that a 'no' vote in next month's French referendum on the Maastricht treaty could herald the collapse of the exchange rate mechanism.
The pound also lost ground against the mark, prompting the Bank of England to intervene in its defence. But trading was light and the Bank's buying of sterling for marks was limited. The pound still closed 0.42 pfennigs lower at DM2.8080, a 27-month low and just three pfennigs above its ultimate floor in the ERM.
For the first time the pound fell 75 per cent of its permitted level below its central rate against the ecu, the basket of ERM currencies. There is a 'presumption' in the ERM rules - but not an obligation - that a country will take action when its currency falls this low. But this rule has been ignored by other countries in the past.
Steve Barrow, economist at Chemical Bank, said the pound could well be trading around its DM2.7780 floor in the ERM when the Bundesbank's policy council next meets on 3 September. 'If the Lombard rate is raised then the Chancellor is almost certainly going to have to raise our interest rates too,' he said. Yesterday's Bundesbank council meeting left policy unchanged.
The nervous mood in the currency markets was exacerbated by worries about President George Bush's re-election prospects and by rumours that G7 finance ministers would be meeting next week to discuss the dollar. The British authorities would not comment on the rumours. But G7 sources said a meeting had been planned, although it was likely to involve officials rather than ministers.
Against the uncertain international background, the pound took little comfort from figures showing the first rise in manufacturing investment in Britain for two years and a sharp fall in stocks of unsold goods during the second quarter.
Manufacturing investment between April and June was 3.1 per cent higher than in the previous three months, adjusting for seasonal factors and inflation, according to the Central Statistical Office. This brings to an end a sequence of eight quarterly falls.
Analysts warned that the figures could be revised, but said that investment was planned with such a long time-scale that the absence of a post-election upturn was unlikely on its own to prompt a renewed decline.
The CSO also announced an unexpected sharp fall in manufacturers' and distributors' stocks of goods. Economists said the seasonally adjusted fall of pounds 1.1bn, at 1985 prices, might signify that spending in the economy had been stronger than expected.
July money-supply figures from the Bank of England were interpreted as confirming the Bank's view that the economy is 'bumping along the bottom'. The monthly growth of the narrow measure M0 - largely notes and coins in circulation - accelerated to a seasonally-adjusted 1.2 per cent. M0 was 2.4 per cent higher than a year earlier, up from 1.3 per cent in the year to June.
Bank and building society lending rose by pounds 2.8bn in July, higher than the pounds 2.5bn average over the past six months. But analysts said bank lending had almost certainly been boosted by the rush to beat the re-introduction of stamp duty on house sales.
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