After the collapse of several European currencies last week, most market operators believe the Exchange Rate Mechanism and hopes of a single currency are dead for the foreseeable future. The latest crisis may also be seen as the moment when the dollar was toppled from its pedestal as the world's pre-eminent reserve currency. The mark looks set to assume that role.
Some currencies steadied on Friday as the markets took a breather from the hectic trading of earlier in the week. But the sentiment driving exchange rate movements remains unchanged, and further violent currency fluctuations look virtually certain.
In response to the rising mark, Spain was forced to devalue the peseta last Sunday while France, Italy and Denmark have all had to raise interest rates to defend their currencies.
"The ERM is dead as a proper functioning currency system," said Neil Mackinnon, economist at Citibank. "It would also be a disaster now to move ahead quickly to a single European currency. The whole project is unworkable. The mark is effectively the single currency."
The fall in the franc against the mark has done most to undermine the ERM. The franc has come under intense pressure because of worries over France's 12 per cent unemployment rate and Jacques Chirac's leadership in the presidential election polls. Mr Chirac, who has emerged unexpectedly as the front runner for the elections in May, is more sceptical about a single European currency than his main rival, Edouard Balladur.
But current French policy to maintain a strong franc is also causing concern. "We're getting more worried about the franc," said Chris Turner, currency expert at BZW. "We think there is not the resolve within France to address the structural unemployment and other problems."
The franc slumped to Fr2.81 against the mark, although it is still 8 per cent above its permitted floor in the ERM. However, dealers expect it to slide further this week.
Sterling has also suffered heavily against the mark as investors worried about political uncertainties in Britain and a surprise £1.6bn trade deficit for December reported on Friday. The pound fell on Friday from 2.25 to 2.236. Some analysts expect sterling to sink to DM2 by the end of this year.
"The pound is on the ropes," said Mr Mackinnon. "The fall against the mark may be good for exports but it is bad for inflation and will slow up the economy more than the Government expects."
There is no sign of the markets losing their appetite for the mark. Bundesbank officials tried to ease the situation last week by suggesting that German interest rates might fall over the medium term. But dealers believe rates are more likely to rise in the foreseeable future, increasing the mark's attractiveness.