The pound dropped 0.77 pfennigs to DM2.3730, a record close on Bank of England calculations. On Monday the pound briefly touched an all-time low of DM2.3550 in the Far East but recovered to a record opening low of DM2.3664 in Europe.
Against the dollar, sterling gave up more than two cents from its highest trading level. The pound ended one cent down on Monday's close at dollars 1.4440, the lowest finish since 22 December 1986.
Multiplying signs of a firming US recovery were boosted yesterday by the sharpest increase in the index of leading indicators in more than nine years. This development, combined with the recent turmoil in the European exchange rate mechanism, revived demand for the US currency and sterling was the principal loser.
Market confusion persisted over what developments were shaping monetary policy and who was running it.
Despite denials that further cuts in base rates were being contemplated, the money markets still pointed to a further fall in late spring. John Shepherd, of Warburg Securities, said: 'The real issue is the lack of consistency in policy, whoever is running it.'
With evidence of a firm US economic recovery piling up by the day, the dollar rose against most leading currencies, gaining one pfennig to DM1.6430 against the mark. Reimut Jochimsen, a Bundesbank board member tipped as the next vice-president of the bank, acknowledged the dollar could 'maintain a higher value for quite some time'.
There is mounting anticipation in financial markets that the Bundesbank may soon cut its key interest rates. However, Mr Jochimsen's comments suggest some caution since, in addition to moderating wage and credit demands and public spending curbs, the Bundesbank places great weight on the mark's strength against the dollar as a counterweight to inflation pressures.
Nevertheless, most analysts expect to see a modest reduction by early March at the latest.
The dollar's latest lift came after the US index of leading indicators for December shot up by 1.9 per cent, the biggest monthly increase since April 1983. The increase exceeded market expectations and followed a rise of 0.7 per cent in November.
Although this index is regarded as an indicator of future economic developments, it can sometimes give a distorted impression. But the latest figures follow a clutch of data pointing to gathering strength in the US economy.
In addition, indications that the Clinton administration is planning a dollars 31bn stimulus for the US economy underpinned the dollar.
US national output expanded at an annual rate of 3.8 per cent in the fourth quarter of last year, a similar rate to the previous three months. Those figures were followed by an authoritative survey of manufacturing industry, by the National Assocation of Purchasing Managers, which suggested that industry was experiencing its best expansion rate for 4 1/2 years.
Orders for durable goods have risen sharply and fresh indications of consumer strength emerged yesterday with a 6.3 per cent rise in sales of new single-family homes in December.
However, some analysts believe the dollar might encounter a setback on Friday when employment figures for January are released. A rise in non-farm payroll employment of 109,000 is expected.
But the unemployment rate is likely to remain at 7.3 per cent, indicating that the recovery is providing insufficient growth in jobs, which explains the Clinton administration's plans for a stimulus package.
Gerard Lyons, of DKB International, said: 'The key to continued recovery is the consumer. Whether consumer spending remains buoyant depends on employment growth and higher wages, both of which are slow.'
Britain's gold and foreign currency reserves rose by an underlying dollars 38m in January to dollars 42.55bn.
The Bank of England was detected selling pounds for marks last month, but the transactions may have taken place in the forward market and would not therefore show up in the latest figures.
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