The pound has risen by nearly 6 pfennigs this week. Sterling has been boosted by a growing conviction - triggered by last week's buoyant money supply figures - that recovery in Britain may be in sight. Investors who bet on a falling pound have also been cashing in profits before the year-end.
The pound rose by a full point yesterday to 80.5 per cent of its 1985 value - its biggest jump in two months. Against the mark the pound gained 3.72 pfennigs to close at DM2.4707. Commerzbank, the German commercial bank, predicted that recovery in Britain could push sterling to between DM2.50 and DM2.60 by the middle of next year.
'Things are looking a touch more optimistic,' David Simmonds, currency analyst at Midland Montagu, said.
The pound's rise against the mark reflected hopes that non-inflationary pay deals and weak economic statistics in Germany would prompt the Bundesbank to cut interest rates early next year - or perhaps even next week.
Jurgen Moelleman, the German economics minister, said that the 0.5 per cent fall in western German gross domestic output in the third quarter of the year was a serious danger signal. 'We must now do everything to avoid economic weakness in the west becoming entrenched,' he said.
Industrial output in Germany also fell by 2.2 per cent in October, according to the Economics Ministry. Unemployment in the west rose by 54,000 in November to 1,884,000, some 6.1 per cent of the workforce.
The biggest boost to hopes of a cut in German rates was the 3.1 per cent pay settlement agreed for 125,000 workers in the steel industry. 'This can hardly be seen as inflationary with inflation expected to be over 4.5 per cent in a couple of months,' Kit Juckes, economist at Warburg Securities, said.
Most dealers expect the Bundesbank to cut rates early next year, although a few think the move may come next week. The weaker mark also took pressure off the troubled French franc, which edged away from its floor in the exchange rate mechanism.
The franc was helped during the morning by central bank support buying. Michel Sapin, the French finance minister, warned that 'anyone who wants to damage the franc-mark link will find himself faced with the solidarity of the two (finance) ministers and the two central banks'.
A German Finance Ministry spokesman also confirmed that the countries might consider tightening the link between the mark and the franc in the ERM, as reported in the Independent on Sunday. But he added this was not on the agenda of the Bonn summit, which started yesterday.
The dollar gained ground against the mark but the pound gained 1.32 cents to dollars 1.5627.
Factory orders for manufactured goods in the US rose by 1.7 per cent in October, following a 1.3 per cent rise in the previous month, the Commerce Department said. The number of new claims for unemployment benefit also fell by 12,000 to 362,000 in the week ended 21 November, according to the Labor Department.
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