The pound weakened sharply late in the evening as banks in Tokyo and Sydney opened their trading desks hours early to cope with the referendum results. Trading was 'thin but real', said one big bank as the pound softened 4.5 pfennigs to DM2.5650.
The deterioration in the Far East was blamed not on the referendum result but on reports that Norman Lamont, the Chancellor, is about to cut interest rates by a half or one percentage point from the present 10 per cent, against a background of City hopes that base lending rates could be down to 8 per cent by the end of the year.
Mr Lamont has been attending the International Monetary Fund annual meeting in Washington. But if the hints coming out of Washington hit the pound too hard today, as full-scale trading resumes, it could force him to cut back or abandon his plans for an interest rate reduction.
Before the pound weakened, the City had been expecting a further rise in shares this week on the back of lower interest rates. After sharp rises in equities when Britain left the European exchange rate mechanism last week, there were fears that prices could fall back sharply unless the Government delivered the widely expected cut in the cost of borrowing as soon as possible. Many in the market are looking for a cut of at least one percentage point in base lending rates in the next day or two.
The FT-SE 100 index of leading shares surged 8.27 per cent last week on sterling's withdrawal. The market was helped as devaluation of the pound boosted exporting companies and as overseas investors bought shares cheapened by the fall in sterling.
Richard Kersley, chief equity strategist at Barclays de Zoete Wedd, said: 'The market was driven up by hopes of rates coming down. We need to see some evidence of that this week if it is going to go any better, or hang on to the gains so far.'
Ian Harwood of Warburg Securities said: 'Equity investors will be more excited about an interest rate cut this week than last. There will be pressure on the Government from inside the Conservative Party and from industry.'
The economy was fundamentally still weak. 'Equities will be more affected by interest rates than by the French vote. If we have cut loose from the Germans, what they do matters less.'
David Bint, equity strategist with Credit Lyonnais Laing, said: 'The vote had become broadly irrelevant as far as the equity market is concerned.' He saw Mr Lamont's indications that he would monitor some asset prices, including houses, as part of his policy for setting interest rates as a further pointer to reductions.
But there were cautious notes about shares. Michael Marks, chief executive of the stockbroker Smith New Court, expected a mildly negative reaction from the UK market to a narrow yes vote in France. 'I don't think the market will be that much changed.'
With a small majority in favour of Maastricht in the referendum already the City consensus on Friday, dealers said they expected sterling would be little affected.
Lee Ferridge of NatWest Capital Markets said the referendum 'will be fairly neutral for sterling. A 'no' would have been quite good for the pound and a strong 'yes' would have been bad'.
He predicted the narrowness of the vote could put heavy pressure on the franc and prevent a reduction in French interest rates. Late last night the franc was trading 2.25 centimes better against the mark at Fr3.4225.
But others said a yes vote cleared the way for the French government to reaffirm its commitment to the ERM and announce a half-point cut in lending rates.
Simon Briscoe of Greenwell Montagu said the referendum result was 'turning out to be the most boring outcome imaginable'. The new UK monetary target was 'good news but the contents at the moment are fairly vague'. He added: 'There is still plenty of time to cut interest rates.'
Though the outcome of the French vote was in line with expectations, anyone who thought Maastrict and economic and monetary union would go forward as before should think again, Mr Briscoe said. 'A lot has been learnt about the problems of EMU and the scepticism of financial markets.'
Though a number of firms were working last night, business was thin. Salomon Brothers had 40 to 50 dealers ready to trade currencies but most were twiddling their thumbs pending the opening of the Japanese market after midnight. Greenwell Montagu had about 40 staff at their desks, about 10 per cent of the total.
Normally Salomon's trading floor is empty on Sundays. Few houses traded shares, preferring instead to start work early this morning. Smith New Court's dealers were turning up at 6.30am.
Initial reactions were confused by news that rural France had voted no, though this pattern was expected. Once the move towards a yes vote came through, dealing picked up, with the French franc gaining ground.
Ruth Lea, chief economist at Mitsubishi Bank in London, said: 'The narrow French 'yes' is almost as bad as a 'no' vote and will mean a slow lingering death for the Maastricht treaty. It lends no real credibility to moves towards closer European union and is likely to increase Britain's determination to stay out of Europe's exchange rate mechanism.'
Bill Martin of UBS Phillips & Drew said: 'It is far from clear that the vote will stop the attack on the rest of the ERM. The remaining currencies (all except sterling and the lira) could come under pressure.' Mr Martin, a long-term opponent of Britain's membership of the exchange rate mechanism, said: 'What matters now is domestic monetary policy. It is important it is on some credible basis.'
Business leaders were dismayed by the narrowness of the French vote and forecast more uncertainty.
Peter Morgan, director-general of the Institute of Directors, said anything less than a two-thirds 'yes' majority should mean Britain should not ratify the Treaty.
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