More currency mayhem will put ERM to the test

THE MAYHEM in foreign exchange markets is expected to continue this week, after a tumultuous close last week for European currencies.

Analysts believe that without co-ordinated government action, investors will continue to flee to the safe havens of the mark and yen.

Neil MacKinnon, chief economist at Citibank, said: ``We haven't seen anything yet.'' He said international investors were uncertain about interest- rate moves and political developments in the weak-currency countries, and saw no reason to reverse flows of capital out of these markets.

James Montier, currency economist at Kleinwort Benson, said: ``There does not seem to be anything that will pull the currency markets out of this quagmire. It would take some quite dramatic action by governments.''

One rumour sweeping London and Madrid on Friday was that the Spanish government would withdraw from the exchange rate mechanism this weekend. The Spanish Ministry of Economy strongly denied the rumour and said it would not be asking for a meeting of the European Monetary Committee.

A spokesman for the ministry said: ``The peseta is not going to leave the system.'' Dealers were unconvinced by the denial, however, and reported signs of intervention by the Bank of Spain.

The mark has set repeated new highs against other European currencies and the dollar in recent weeks. On Friday, it was the turn of the pound, the Italian lira and the Irish punt to hit new record lows. The lira fell to 1,275 to the mark, while the pound and punt fell to DM2.19.

The dramatic exchange rate moves were given new impetus by the failure of the Bundesbank to cut German interest rates on Thursday, despite earlier hints by president Hans Tietmeyer that it might do so. Mr Tietmeyer repeated his comments on Friday, the day after the Bundesbank council meeting, saying the mark was ``slightly overvalued''.

But most analysts thought the same tease would not work twice and that the chance to orchestrate a co-ordinated cut in German rates and simultaneous rise in US and UK interest rates had been lost.

A second factor was the close margin by which the Italian government passed its confidence vote and mini-budget. The media magnate Silvio Berlusconi has warned that his Freedom Alliance will continue to oppose the economic reform plans of Mr Dini's technocratic government. Observers are gloomy on the lira's prospects. Stephen Hannah, director of research at IBJ International, said: ``All the authorities can do is demonstrate their commitment to long-term reforms. Italy needs some very tough austerity measures, but it is likely to get fresh elections.''

Important economic statistics will be thin on the ground this week. In Britain, a CBI survey and the retail prices index for February will provide more evidence on growth and inflation, but the main focus of attention will be Wednesday's monthly meeting between the Chancellor and the Governor of the Bank of England.

Although no immediate rise in base rates is expected, the economist Adam Cole at James Capel points out that the fall in sterling so far this year has more than counteracted the effect of the half-point rise in base rates last month.

Mr Cole said a rise in interest rates of half a point would be needed to keep monetary policy as tough as it was at the beginning of this year.

There are few figures due out in the US either, where recent economic evidence has suggested that growth is slowing. Dealers will focus on the 28 March meeting of the Federal Reserve's policy committee. Although the Wall Street consensus is that domestic considerations will win, and the Fed will keep interest rates on hold, there is growing doubt about how much longer it can ignore the dollar's weakness.

William Sterling, international economist at Merrill Lynch in New York, said: ``The days of setting US interest rates primarily on domestic considerations may be drawing to a close."

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
11 best bedside tables

11 best bedside tables

It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

Italy vs England player ratings

Did Townsend's goal see him beat Kane and Rooney to top marks?
Danny Higginbotham: An underdog's tale of making the most of it

An underdog's tale of making the most of it

Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

Steve Bunce: Inside Boxing

Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police