The verdict in a speech last night of Hans Tietmeyer, Bundesbank president, on the birth of the euro kept dealers on edge all day, however.
Mr Tietmeyer was assumed to be unenthusiastic about the compromise which puts Frenchman Jean-Claude Trichet in the ECB's top job only four years into the term of Wim Duisenberg, its first president.
Theo Waigel, Germany's finance minister, was at pains yesterday to stress that Mr Duisenberg could stay on for the full eight years of his term of office if he wanted. "A date for his retirement is not included in Duisenberg's official declaration. He himself can decide how long he should stay in the job," Mr Waigel said in a German radio interview.
One Bundesbank council member, Klaus-Dieter Kuhbacher, had already described the compromise as a breach of the Maastricht Treaty. "This is not a good precondition for the start," he said.
The markets shrugged off the political fallout, reading the weekend's events as a signal for the Bundesbank to demonstrate its toughness by starting to raise German interest rates. Combined with the widespread expectation that UK rates have reached their peak, this took the pound lower yesterday.
The Danish central bank raised its short-term interest rate in a surprise move yesterday. Although the move was a response to domestic economic conditions, it helped the shift of sentiment on the foreign exchanges.
Figures from the Bank of England yesterday suggested the trend growth in M0, the narrow money measure consisting mainly of cash in circulation, has slowed. Economists saw this as helping the doves on the Monetary Policy Committee hold UK interest rates unchanged at 7.25 per cent at their meeting this week.
Sterling fell 3 pfennigs to DM2.94, while its index against a range of currencies fell by 0.8 to 104.5. The pound has returned to its lowest levels for more than two months.
Alison Cottrell, chief economist at Paine Webber, predicted the markets would focus on the likely path of interest rates and the economic slowdown in the UK, weakening the pound. "Every growl from Tietmeyer will mean more relief for UK exporters," she said.
But analysts had different interpretations about the implications of the row over the ECB for the future of the single currency. Some were pessimistic, saying a pattern of political interference had been set and predicting its safe-haven status would send the pound higher again.
Julian Jessop of Nikko Europe said: "The market reaction has been quite muted so far, but this is the lull before the storm."
Others said the wrangling over the ECB presidency had been fully expected and financial markets would now focus on its future operations.
Graham Bishop, an expert on economic and monetary union at Salomon Smith Barney, said the new bank's 17-member governing council would turn out to be very tough in practice. "There is no chance of that group going off on some mad policy spree just because Duisenberg has only been appointed for four years rather than eight," he said.
He also played down fears that the Euro-X council of finance ministers would try to interfere in the new central bank's policies. Mr Bishop predicted it would not step in until it faced its first economic crisis.
"That is when the UK will realise that being on the outside really matters," he said.Reuse content