The German mark soared to new highs against the troubled US dollar, sterling and other European currencies in hectic trading. There was no sign that central banks were trying to halt the dramatic movements in exchange rates through direct intervention as they had, with little success, last week.
The franc was in deep trouble, falling to its floor against the mark in the early afternoon, but gaining a little to close at 3.5480 to the mark. The franc has been weak for the past three weeks, since opinion polls started to show that the presidential election in April/May might be closely fought.
French commentators yesterday took comfort from the way the devaluations were handled in Brussels, noting that mechanisms put in place after the Black Wednesday crisis in 1992 had functioned well. Further instability, however, could jeopardise the prospects for European monetary union.
Any hint that EMU might not be on course could have a direct impact on the French election campaign, assisting the cause of Jacques Chirac and damaging that of the prime minister, Edouard Balladur.
Mr Balladur has made the achievement of a single European currency by 1997 a main point of his election programme, but he has also tried to make the fate of the franc an election issue. Last week, he had the election programme of his rival, Mr Chirac, costed, and described the result, a stratospheric 350bn francs, as a figure that would endanger the currency's value.
Despite pleas not to play politics with the franc Mr Balladur returned to the theme at the weekend, presenting himself as the franc's only protector.
If the franc continues to fall, Mr Balladur's claim will be exposed as empty. If the ERM starts to unravel, and the attainment of a single currency is rescheduled for 1999, Mr Balladur has lost another plank of his programme.
The dollar yesterday touched a record low of 92.45 yen and at DM1.40 approached its all-time low against the mark - a 10 per cent fall this year. Sterling was caught in the crossfire, reaching a low of DM2.2690 late yesterday afternoon, more than six pfennigs lower than its closing value on Friday. However, it held its own against the troubled US currency.
International investors are unwilling to buy US assets, putting downward pressure on the dollar. Part of the reason is that Japanese investment funds need to repatriate money before their financial year-end on 31 March. Countries are also unwilling to adjust interest rates, which might stabilise the dollar.
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