Pound suffers a fresh battering but shares soar

The pound was battered down to its lowest level for more than a month on the foreign exchange markets yesterday.

But the stock market took heart from the exchange rate weakness, with the FTSE 100 index ending more than 47 points higher at a record 4,275.8.

Sterling's index against a range of currencies closed 0.8 points lower at 94.4. It has lost more than two pfennigs against the German mark in 24 hours.

Dealers blamed the pound's renewed decline on a combination of expectations that Kenneth Clarke, Chancellor of the Exchequer, will not raise base rates after the monthly monetary meeting on Wednesday and fears that the Federal Reserve might increase US rates after its Open Market Committee meets on Tuesday and Wednesday. These were fuelled by figures yesterday showing that the American economy grew at a steamy pace in the final quarter of last year.

"The pound's higher level was buoyed by speculative inflows. That hot money is now going elsewhere," said Paul Lambert, a currency analyst at the investment bank UBS. He added that the Toyota president Hiroshi Okuda's warning earlier this week about future investment in Britain if the pound stayed out of the single currency had also led to sales of the pound for yen.

The paradox in sterling's very recent weakness is that if it goes much further it will deprive the Chancellor of his best excuse for not taking Bank of England advice to increase the cost of borrowing. The Bank's Governor, Eddie George, has become increasingly forthright in saying this is needed if inflation is to hit the Government's 2.5 per cent target.

The sterling index ended yesterday less than 4 per cent above its level when the Bank drew up its last quarterly Inflation Report, when it started arguing for rates to go up. The next report is due on 12 February.

David Coleman, chief economist at CIBC Wood Gundy in London, warned that Mr Clarke's resistance might suit his electoral needs but held dangers for sterling. "Once the market thinks Clarke is behind the game, the game is up," he said.

Figures yesterday showed America's GDP growth rebounded in the final quarter of last year. This tilted Wall Street analysts towards the view that Alan Greenspan, Fed Chairman, will favour a tighter interest rate policy, even though most believe an erratically strong trade performance boosted the economy at the end of last year.

The US economy expanded at an annual rate of 4.7 per cent in the fourth quarter of 1996, a much faster pace than economists had expected. Consumer spending picked up strongly. In addition, exports surged while growth in imports slowed down.

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