With trading in the foreign exchange markets thinning out as Christmas approaches, the pound continued to rise. It climbed by 1.3 cents against the dollar to dollars 1.5950, having failed to sustain a break through dollars 1.60. It was virtually unchanged against the mark at DM2.4913, with DM2.50 still proving a psychological barrier.
The pound rose by 0.3 points against a basket of other currencies, to 81.5 per cent of its 1985 value. At one stage the pound reached 81.7, its highest in nearly eight weeks. It was pulled back by the growing conviction in the markets that German interest rates will be unchanged tomorrow.
The ERM had a relatively quiet day, although the French franc was under some pressure at around Fr3.41 to the mark. The Irish punt has been helped by the recent strength of sterling. The pound has been buoyed by its safe-haven status from tensions within the system and by flickers of economic optimism in Britain.
Most Frankfurt economists believe the Bundesbank will relax its monetary target slightly at its council meeting tomorrow. The target for the broad measure of money supply, M3, is growth of 3.5-5.5 per cent from the average level of the fourth quarter. M3 consists largely of cash in circulation and bank accounts.
This is expected to rise to 4-6 per cent, although some analysts believe the range could be as high as 6-8 per cent, as recomended by Germany's 'five wise men' - leading independent economists who advise on policy. Growth in M3 during 1992 is likely to average about 9.5 per cent, boosted by subsidised lending in eastern Germany. The Bundesbank might decide to set a relatively low target for 1993 money supply growth because it believes too much money has been created in 1992.
George Magnus, economist at Warburg Securities, said he expected the target to be raised to a mid-point of 5.5 per cent. He also said that a cut in German interest rates could not be ruled out. 'There is a risk that they could announce a surprise cut in rates in deference to the accumulation of recessionary evidence,' he said.