Franc slips nearer its floor as pound moves ahead

THE FRENCH franc slipped slightly closer to its floor in the European exchange rate mechanism yesterday, while the pound was buoyed by a surprise surge in British manufacturing production in May.

After a nervous day's trading, the franc ended the day at Fr3.4125 to the mark, just 1.8 centimes above its floor in the ERM. The franc then sank further in after-hours trading, when ERM members are no longer obliged to keep their currencies within the system's bands. Some dealers reported that the Bank of France had been intervening in the market in the franc's support.

Pressure on the franc was alleviated as dealers unwound positions ahead of today's Bastille Day holiday in France. The Bundesbank's decision to set a variable- rate 'repo' offered the franc no help, suggesting to some analysts that if there were no change in German interest rates at Thursday's Bundesbank council meeting it could put the franc under pressure again at the end of the week.

The franc has been under pressure since Insee, the French national statistics agency, warned that the French economy was set to shrink by 1.2 per cent this year, against government predictions of a 0.8 per cent drop. Dealers fear the French government will have to cut interest rates more quickly than Germany, and might have to leave the ERM to do so.

The pound, already enjoying the benefit of 'safe-haven' status outside the ERM, moved ahead on the unexpected 1.8 per cent rise in factory production in May. The pound closed 1.7 cents higher against the dollar at dollars 1.4935, with the US currency also weakened by subdued US factory gate inflation figures, which lengthened the odds on a rise in dollar interest rates. The pound also rose by over a pfennig against the mark to close at DM2.5678.