Pound in for more strife

By Richard Phillips and David Usborne in New York

The foreign exchanges are set for further turmoil this week, with sterling in disarray after Tory party strife and the dollar suffering from comments from Federal Reserve Chairman Alan Greenspan about "irrational exuberance" in the markets.

Stock markets tumbled worldwide on Friday, wiping pounds 20bn off the value of UK shares, as the powerful Fed chief tried to prick what he saw as the overvalued bubble of Wall Street share prices.

Investors there rallied late on, however, which means UK shares are likely to bounce back on Monday from their biggest day's drop since October 1992. Surprisingly weak US jobs figures, showing employment rising only moderately, provided the tonic - reducing inflationary fears and the immediate threat of higher interest rates.

But Neil Mackinnon, chief economist at Citibank in London, warned this weekend that European investors would be more cautious on their strategy for 1997 in the wake of Friday's chaos. "Investors will have to sit down and take a hard look at where they go from here." He said international investors had also burned their fingers on sterling, which had upset predictions repeatedly.

The currency has defied pundits this year, climbing to its highest levels against the dollar and the mark since the UK left the ERM in 1992, only to weaken last week after Eddie George, the Governor of the Bank of England, played down the need for further rises in interest rates.

The outlook for sterling this week will be dominated by political considerations, with the Government losing its majority after Tory MP Sir John Gorst said he would refuse to co-operate with the Government.

Sterling closed at $1.64 in London, having recovered much of the ground lost on the news of Sir John's decision. It was also bailed out by the dollar's weakness against other major currencies, following Mr Green- span's remarks.

The continuing row between Kenneth Clarke and John Major, however, is likely to take a further toll on sterling.