Pound under more pressure as Finns devalue

THE POUND and share prices came under fresh pressure yesterday as fears of an exchange rate mechanism realignment were fuelled by Finland devaluing its currency for the second time in a year.

Finland had almost exhausted its reserves of foreign currency attempting to peg the markka against the ecu, the weighted average of ERM currencies. In the face of large outflows of cash from Helsinki, the Bank of Finland yesterday gave up the struggle and announced it would temporarily float the markka and peg it at a lower rate against the ecu when the market had stabilised.

The markka promptly fell by 14 per cent, having been devalued by 12.3 per cent in November last year.

The Bank of Sweden immediately increased its key overnight interest rate by eight percentage points to a record 24 per cent in an attempt to ward off speculation about a devaluation of the Swedish krona.

The Scandinavian crisis prompted widespread buying of the 'safe haven' German mark on nervousness about an ERM realignment. The mark was also helped by Helmut Schlesinger, the Bundesbank president, denying he had made a commitment not to raise German interest rates at last weekend's meeting of EC finance ministers and central bank governors in Bath. The German federal statistics office also said yesterday that the economy of eastern Germany had shrunk by more than 11 per cent in the year to the second quarter of 1992.

The nervousness in the currency markets was exacerbated by two opinion polls showing only small majorities of French voters in favour of the Maastricht treaty on European union. They suggested that recent hopes that the tide of opinion had turned back in favour of Maastricht may have been premature.

The pound ended the day 0.9 of a pfennig lower at DM2.7878, less than a pfennig above its floor in the ERM and more than 16 pfennigs adrift of its central rate. The dollar fell through DM1.40 and closed more than a pfennig down on the day at DM1.3916. The pound ended a cent stronger against the dollar at dollars 2.0035, its highest for more than a decade.

The weakness of the dollar continues to reflect fears that the gap between German and US interest rates - nearly seven percentage points - could widen further if the Germans raise rates or, more likely, the Federal Reserve cuts its discount rate to give a pre-election boost to the struggling US recovery.

Gerard Lyons, economist at DKB International, said events in Scandinavia had underlined the dangers for the weaker ERM currencies. 'The Finnish devaluation shows that intervention cannot continue indefinitely, while the Swedish move shows that interest rates increases have to be big not to be counterproductive,' he said.

Although the mark was strong, the ERM escaped severe strains. The embattled Italian lira, which is seen as the first candidate for devaluation if the ERM is realigned, survived relatively unscathed. Dealers reported Italian overnight rates forced up to 25 per cent to keep pressure off the currency.

The weakness of the pound rekindled fears that the Government might be forced to raise interest rates in Britain to defend the currency. The three-month interbank lending rate - the market rate that tracks City base rate expectations - rose by one-eighth of a percentage point to 10 3/8 , more than a quarter point above the current 10 per cent base rate.

The stock market was also unnerved by sterling's weakness. The FT-SE index of leading shares fell 34.5 points to 2,337.7.

Commentary, page 21

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform