Pound caught in crossfire again

BY DIANE COYLE,

CLIFFORD GERMAN

and MARY FAGAN

The pound and the US dollar took another battering on the foreign exchanges yesterday. Evidence of slower output growth in Britain and new signs of commodity price inflation combined with nerves about the Scottish local election results to ensure that sterling was once again caught in the international currency crossfire.

The pound fell more than 1.5 pfennigs to reach DM2.20 at its lowest point yesterday, closing at DM2.21. Its trade-weighted index has dropped nearly 5 per cent this year.

The dollar again reached a record low against the yen, touching Y85.11. An estimated $5bn-worth of intervention by central banks this week has not revived the dollar. A leaked draft of the International Monetary Fund's economic outlook report suggested it might call for international interest rate co-ordination to prevent further currency turbulence at its meeting in three weeks.

Traders said expectations that US and British interest rates were unlikely to rise continued to drive the dollar and sterling down. Britain's industrial output edged up in February, reversing a fall the previous month. But the trend has clearly flattened, suggesting there is no domestic need for higher base rates.

Total output rose 0.3 per cent in the month, while manufacturing output was up 0.4 per cent. In the latest three months output declined by 0.3 per cent, and the annual change slipped to 4.3 per cent.

Industries with the highest exposure to export markets have seen the strongest output growth in the latest three months. Production of electrical and optical equipment rose 0.9 per cent, led by computers, telephone equipment and CDs. Chemicals output was up 1.1 per cent.

The chemicals sector provided the brightest spot. Its output for 1994 rose by 6.2 per cent compared with just 2.6 per cent the previous year. The Chemicals Industries Association warned, however that growth would slow in 1995.

There were falls in production of food, drink and tobacco, transport equipment and wood products in the three months to February. Mild weather took output of the electricity, gas and water supply industries down 4.4 per cent compared with the previous three months.

Sales of new cars are also depressed , with registrations for March down by 1.8 per cent on March 1994 and the trend heading down, according to figures from the Society of Motor Manufacturers and Traders. Private purchases slumped by 7 per cent, partly offset by a rise in fleet and business sales.

The official output statistics, painting a picture of a slowdown, are at odds with the extremely buoyant evidence provided by the Confederation of British Industry's monthly survey. The Central Statistical Office figures are based on a much bigger number and more representative mix of firms, but have tended to be revised upwards.

Signs of a resurgence in commodity price inflation added to the gloom. Platinum prices rose sharply during the week, touching a four-year high of $459 an ounce on Wednesday. They fell back around $8 yesterday.

Other traditionally volatile commodities are likely to move higher again after a brief shake-out in February, reflecting rising demand, especially in emerging markets. This has raised fresh fears of an inflationary impluse to world economies, especially those with weak currencies.