Sterling plummets on political worries

The pound dived sharply on the foreign exchanges yesterday. "Sterling stinks," said the head of currency trading at one big London bank, speaking for a majority in the market.

The reason traders gave for the pound's fall to its lowest value against the mark in nearly two years was political uncertainty. The Bank of England was believed to have intervened during the day to prevent the exchange rate falling too far, too fast.

The Government's Euro-turmoil came under the spotlight again after the Liberal Democrat's technical victory in a House of Commons vote on Monday calling for a referendum on Europe. Investors in the Far East began selling sterling assets early yesterday morning. Foreign investors fear the split in the Conservative Party or loss of Ulster Unionist support will bring an early election.

The pressure continued throughout the day as the exchange rate went below its 1994 low of DM2.3710, an important psychological barrier. It closed at DM2.3585. Many traders say the currency could soon pass its all-time low of 2.3147. Volumes traded in the foreign exchange market were above average.

Steven Bell, chief economist at Morgan Grenfell, said: "The pound is an easy target. We have an interest rate rise just behind us, so traders will push the currency down and keep on pushing."

This weakness would bring forward the neeed for another increase in base rates.

The Bank of England said at last week's briefing on its quarterly inflation report that the pound's decline since the new year was not a concern.

Although a lower exchange rate is inflationary, bringing higher import prices, the Bank said sterling had been relatively stable for two years. Mervyn King, the Bank's chief economist, said: "There is no mechanical reaction to an exchange rate change. We ask why it has happened."

A weaker currency would be one of the factors taken into account by the Chancellor and the Governor in their decisions on interest rates.

Economists say the Bank of England sees sterling's current weakness as a temporary difficulty. In its view there are no fundamental problems with the economy. However, the Bank did note last week that capacity constraints among exporters posed the risk of higher inflation, and this would get worse if a weaker pound gave another boost to exports.

Fears that inflation is on the rise could continue to undermine the pound. Figures released on Monday showed industry's costs are growing at the fastest rate in 13 years. The retail price index for January will be published today.

Steve Barrow, currency analyst at Chemical Bank, said: "If the inflation figures are disappointing, the market will look at Britain as another peripheral European economy. It will not give the Bank of England a lot of credit for pre-emptive interest rate rises."

Another pessimist about the pound's prospects was Adrian Cunningham, currency analyst at UBS. He said: "As far as international investors are concerned, the British Government is slipping on every banana skin it can find."

John Shepperd, Yamaichi's chief economist, said: "The pound will stay vulnerable. The economy is in good shape. Politics are undermining sterling."

Some analysts were more positive. Huw Roberts, at NatWest Markets, expects sterling to drift lower, but not to fall much more near-term.

Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
art
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
Travel
travel
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
PROMOTED VIDEO
News
i100This Instagram photo does not prove Russian army is in Ukraine
News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
Morrissey pictured in 2013
people
Sport
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Environment
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
News
people
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

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices