Pound tumbles as smooth launch of euro notes boosts UK entry hopes

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The Independent Online

The pound tumbled against the euro yesterday as the successful launch of notes and coins raised hopes that British membership of the single currency was now more likely.

The euro surged more than 2 per cent against sterling, its largest one-day gain to date, as it made gains across the board, when a feared chaotic launch of notes and coins failed to materialise.

The euro surged by 2.6 per cent. It hit a four-week high of 62.80p compared with 61.20p on Monday. Against the dollar it hit a peak above the psychological 90 cents mark – a gain of 1.85 per cent – and hit a 27-month high against the Japanese yen.

Analysts said the euro's strong gains against the pound were driven by speculation that the Government was planning a referendum during this parliament.

The rumours were fuelled by strongly pro-euro comments by Peter Hain, the Minister for Europe, who said he doubted sterling could operate as a "parallel currency" to the euro.

The Government is committed to publishing the results of its assessment of the five economic tests for UK membership no later than next June.

Mark Miller, UK economist at Morgan Stanley, said he believed the anticipation of that announcement would push the euro towards an exchange rate of 70p, which he described as "fair", by the end of the year.

"The successful transition to notes and coins and the movement against sterling suggests that as the assessment comes closer there is a real chance the pound will move closer to 70p, which does not look so distant now," he said.

Depreciation in sterling would come as a much-needed boon to Britain's recession-hit manufacturing sector, whose efforts to sell into its largest export market have been hampered by the exchange rate.

Shares in Corus Group, the UK's largest steelmaker, rose more than 6 per cent to a seven-month high yesterday. The company recently said the pound needed to fall at least to €1.40, or above 70p, for it to compete with its continental rivals.

But other analysts warned that yesterday's movement – the fourth New Year rally for the euro in four years – was not necessarily the start of a long-term revival after three years of weakness.

Since its launch as an electronic currency in January 1999, the euro has fallen 23 per cent against the dollar, 11 per cent against the yen and 12 per cent against the pound.

They said the launch of notes and coins had little economic implication as they only made up 6 per cent of total euros in circulation.

Ray Attrill, research director at 4castweb.com, said the euro's exchange rate would still be led by performance of the euroland economy compared with the United States. "The exchange rate will be determined by the US business cycle and we believe the first quarter of the year will look quiet in the US while euroland is labouring, pushing the euro down to 85 cents," he said.

This was highlighted by a stronger-than-expected US manufacturing report which forced the euro to give up some of its gains against the dollar.

US manufacturing activity rose strongly in December, for the second month in a row. By contrast, a comparable survey for euroland showed its industry was still mired in recession.