UK and French shares hit record on rate-cut hopes: Bank of France waiting for two-way market in franc so any reduction will not cause currency to plunge

HOPES that Europe's central banks will soon succumb to the temptation of lower interest rates yesterday weakened the recently liberated French franc and propelled share prices in London and Paris to record levels.

The FT-SE 100 share index rose by 26.4 points to end at 2,969.8, easily clearing the previous record close of 2,957.3 reached nearly four months ago. The increase added pounds 4.2bn to the value of shares on the index.

The Paris stock market also raced ahead, with dealers increasingly convinced that the Bank of France will not abstain from interest-rate cuts for much longer. The CAC-40 index climbed by 34.53, or 1.6 per cent, to 2,149.83. This took the index 20 points clear of its last closing record, reached more than three years ago. The French franc ended the day 2.25 centimes weaker at Fr3.4895 against the mark, nearly six centimes below its former floor of Fr3.4305 in the European exchange rate mechanism.

Steve Barrow, economist at Chemical Bank, said he expected the franc to trade between Fr3.43 and Fr3.53 until the Bank of France clearly signalled the pace of any rate cuts. He added that the French authorities appeared to be waiting for a two-way market in the franc to re-establish itself, so rate reductions would not trigger a plunge.

The Bank of France reinstated its 5- 10 day lending facility at 10 per cent, which dealers interpreted as a signal that rate cuts might be on the way. The 5-10 day rate is soon expected to be reduced back to the 7.75 per cent level seen before the crisis.

The pound ended the day nearly two pfennigs weaker at DM2.5440, with sentiment hit by fears that the Danish central bank may soon be a significant seller of sterling. Renewed European rate-cut hopes did nothing to help the pound, although there was little speculation on a British easing in quiet money market trading.

The dollar weakened on profit-taking following the US unemployment figures, which showed the jobless rate falling to its lowest for nearly two years. Some 6.8 per cent of the labour force were out of work in July, down from 7 per cent in June, according to the Labor Department.

Some 162,000 new non-farm jobs were created last month, up from 44,000 in June. Wall Street economists had expected 174,000 new jobs to have been created, with the jobless rate unchanged at 7 per cent.

The dollar ended the day a pfennig weaker against the German mark at DM1.7045, while the pound gained a fifth of a cent to end at dollars 1.4946. But the US currency strengthened slightly against the Japanese yen.

Hopes of an early economic recovery in western Germany suffered a further setback as the number of unemployed jumped sharply in July to 2.3 million or 7.5 per cent. The Federal Labour Office said these were the worst July data since records began. 'The recession-induced shake-out of labour continues,' it stated.

Economists said the decision to let many workers go before the summer break indicated that firms saw little prospect of business improving. Gerhard Grebe, chief economist with Bank Julius Baer in Frankfurt, said the monthly rise of 159,300 in unemployment was 'a catastrophe which will aggravate the downward pressure on already weak consumption'.

The Labour Office reported 1.2 million unemployed in eastern Germany, or 15.3 per cent, up 67,000 from June. In its latest forecast, the IFO economics institute in Munich said it expected the number of unemployed in all Germany to reach 3.8 million or 9.5 per cent during the course of 1994.