In an attempt to restrain the soaring German mark, Chancellor Helmut Kohl threw his support behind the French franc, and the president of the Bundesbank, Hans Tietmeyer , hinted at a cut in German interest rates.
In earlier trading the franc crashed to another all-time low against the mark and the Bank of France was forced to raise its interest rates. Belgium, Denmark and Portugal followed suit. But there was no sign that British interest rates would rise in the near future.
Despite a calming of the markets yesterday afternoon, Edouard Balladur, the French Prime Minister, felt it necessary last night to issue a stern warning that Paris will "do everything to defend the franc". He blamed the franc's troubles on a flight of capital from the dollar.
In Washington, the US Federal Reserve chairman, Alan Greenspan, responded to European and Japanese complaints that the United States appeared not to care about the slump of the dollar. He told Congress that the 10 per cent fall in the dollar against the mark this year was "unwelcome", opening the way for a possible rate rise to boost the dollar.
Sterling and the dollar both closed a few pfennigs higher against the mark in London, while the French franc stabilised, ending at Fr3.55 to the mark.
But currency analysts thought that the calm would be temporary. Glenn Davies, an economist at Credit Lyonnais, said: ``This is a pause to draw breath." Almost all European Union currencies have collapsed against the mark in recent weeks, destroying the exchange rate stability that the Maastricht treaty says must exist before a single European currency can be introduced.
Some French politicians had hoped to launch monetary union in 1997, but the latest market turmoil - in which the franc has touched an all-time low three days in succession - has underlined that the EU will do well if a single currency is in place by 1999, the second target date set at Maastricht.
The Bundesbank tried to steady ERM currencies by saying it believed that recent world exchange rate movements were exaggerated and not justified by countries' underlying economic performances.
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