Franc and krone come under new pressure

TENSIONS in the European exchange rate mechanism continued yesterday after the Bundesbank left its key interest rates unchanged, renewing pressure on the French franc and the Danish krone.

The franc ended little changed at Fr3.4165 to the mark after slipping to Fr3.4180 earlier in the day. The Bundesbank and the Banque de France launched a light defence of the French currency but the absence of sustained speculation against it allowed them to refrain from a heavy assault or a joint communique to bolster support for the currency, which is close to its Fr3.4305 ERM floor.

The Banque de France was nevertheless unable to cut its key rates yesterday to soften the forces of recession. In contrast, the Danish central bank was forced to lift its key securities repurchase rate, by 1.2 points to 9 per cent, to deflect mounting pressure on its currency.

Analysts saw the Danish decision as a down payment on future Bundesbank support for the krone, which slid to 3.8965 to the mark from 3.8800 compared with an ERM floor of 3.9016. Support for the krone came from the Danish and Dutch central banks, with the Bundesbank notably absent. The Danish authorities were also forced to deny rumours that they were planning to quit the ERM.

Analysts argued that pressure on both currencies might have been more intense but for concern that the Bundesbank might soon reduce its securities repurchase rate, at present 7.28 per cent.

British sources yesterday played down a report to appear in the German Handelsblatt newspaper today that EC leaders have agreed on Frankfurt as the future site of the European central bank and its forerunner, the European Monetary Institute. They said no final decision had been made.