Sterling soars to five-year high against the mark

The pound soared to its highest level against the German mark for almost five years yesterday, with currency experts in the City saying it could rise even higher in the short term. Forecasts of rising interest rates and expectations for a weaker broad-based euro are expected to keep sterling on the boil.

Adam Cole, an economist at HSBC James Capel, said: "Near term there is still upwards pressure on sterling and I can see that intensifying. We could see it peak at 2.90 marks and I wouldn't even rule out DM3.00."

The pound traded at 2.8624 marks yesterday, its highest level for 58 months, putting an even tighter squeeze on Britain's hard pressed exporters. Companies selling products and services abroad have suffered a 19 per cent rise in the trade-weighted value of sterling since its meteoric rise started last August.

Jeremy Stretch, a currency analyst at NatWest Markets, said: "If you're an exporter, there doesn't look to be much sunshine on the horizon for at least six months."

The only hope for the export sector is provided by expectations in the markets that Gordon Brown, the Chancellor, is planning a sharp fiscal tightening in his first Budget on 2 July. Higher taxes would reduce the need for the newly independent Bank of England to raise interest rates, which would take away some of the pound's attractions to investors.

Whether Tony Blair would countenance very much higher taxes so soon after an election campaign fought and won on a low tax ticket, remains uncertain.

James Capel's Adam Cole said: "I think Brown would like to see quite significant tax increases, but having fought the election on taxes Blair is keen to play the honest broker and is likely to stamp on the sort of increases you'd need to take pressure off interest rates."

If the Budget's fiscal squeeze is only modest, interest rates might have to rise further than currently expected. Over the past week an increasing number of analysts have started pointing towards an 8 per cent base rate by the middle of next year. Until recently, the consensus had been for the current interest rate cycle to peak at around 7.5 per cent.

That will keep the upward pressure on sterling as other European countries aim for stable interest rates to speed up debt repayments so they can meet the Maastricht criteria for entry into monetary union. Interest rates in the US are also expected to rise relatively slowly after recent economic data relieved fears that the economy there was overheating.

Further out, analysts agreed yesterday the prospects for the pound were more bearish. If the Budget fails to put the brakes on Britain's buoyant economy and inflation rises again, the currency is expected to suffer.

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