Jitters as currency markets await talks

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Economics Correspondent

The nervous stalemate in the currency markets continued yesterday, as dealers waited for the outcome of a series of meetings between international policy-makers.

The US dollar held its ground but other European currencies weakened against the mark.

The pound touched a new low of DM2.2155 before recovering a little. The lira and peseta closed near their lows. The dollar was steady at DM1.40 and 90 yen at midday in New York.

After a meeting of central bank governors from the G10 industrial countries in Basle held to discuss the recent upheavals in the currency markets, Hans Tietmeyer, the Bundesbank president, said central banks would continue to co-operate closely.

Mr Tietmeyer said the foreign exchange markets had over-reacted to recent economic developments, and there would be a correction in exchange rates. However, countries would have to address their fundamental economic problems, he added.

Eddie George, Governor of the Bank of England, said the pound had had a "wobble downward". He said: "I hope it will perk up."

The bankers' remarks left the markets nervous about the possibility of more intervention by central banks or co-ordinated changes in interest rates.

Their jitters are likely to continue today, as top central bank and treasury officials begin their quarterly two-day monetary policy meeting at the Organisation for Economic Co-operation and Development in Paris.

Neil MacKinnon, chief economist at Citibank in London, said traders in the currency markets were focusing on US and UK economic statistics due to be released this week, and on today's vote on the Italian mini-budget.

"Verbal intervention will not change the situation. The markets are passing judgement on economic policies that they know to be unsustainable," he said.

Most observers rejected calls made at the weekend by Jacques Santer, president of the European Commission, and Franois Mitterrand, the French president, for a tax on international capital movements to discourage currency speculation.

The same proposal emerged in 1992 after the crisis in the European exchange rate mechanism.

Professor Charles Goodhart of the London School of Economics, a former Bank of England adviser, said: "A tax would just protect governments against markets, and I'm not sure that is a good idea. Markets get things wrong, but not as disastrously wrong as politicians."

The British and US governments would oppose any international co-ordination to tax short-term capital flows as impractical. However, the topic is expected to be on the agenda at international meetings later this year.