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
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
News
news
PROMOTED VIDEO
News
i100
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
art
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
tv
Life and Style
fashion
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all