Support for sterling sees fall in reserves

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BRITAIN'S gold and foreign currency reserves fell by an underlying dollars 86m in July, suggesting modest Bank of England support for sterling last month.

At the end of July, the reserves stood at dollars 45.750bn. The figures had no impact on the financial markets, but the gilt-edged market suffered losses of almost half- a-point as concern deepened that the Government was losing control of the economy.

The worries were sparked by recent reports that the Government was looking at plans to revive the housing market, and considering a temporary cut in value-added tax or a relaxation of its full funding rule - in which the budget deficit is fully financed by sales of gilts to the private sector, excluding banks, in any given year.

Reports that the Government was looking at a variety of options to stimulate recovery weighed on the market as a sign of official desperation over the state of the economy. But gilt prices were also depressed by expectations of new gilt issues.

In the currency markets, the mark gained ground. The German currency was supported by concern over a forthcoming opinion poll on the outcome of the French referendum on the Maastricht Treaty on 20 September.

Worries it could suggest a close vote, or even a majority for rejection of the treaty, helped the mark gain a pfennig against the pound to DM2.8355. In quiet trading, the dollar also edged lower, losing 0.43 pfennigs to DM1.4745.

Markets are worried that a French 'no' would postpone European monetary union until the next century, but could hasten monetary union between Germany and a small group of European countries. The mark was also underpinned by the outside chance that the Bundesbank council meeting tomorrow might tighten monetary policy further.

A further indication of the lacklustre US recovery came with the first decline in six months in the US index of leading indicators for June.

The 0.2 point fall in the index, used a guide to future economic trends, suggests a weak recovery in the months to come. In May, the index rose by 0.6 per cent.

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