Euro speculation intensifies as the pound edges lower

The pound fell below the psychological level of three old German marks yesterday, fuelling speculation the UK was edging closer to membership of the European single currency.

The fall put the pound close to levels that businesses believe they could live with if the UK signed up to the euro.

Sterling hit 65.2p to the euro, equivalent to DM2.999, for the first time since October 1999. "We are now close to the rate that manufacturers would regard as competitive," said Stephen Radley, chief economist at the Engineering Employers' Federation.

A survey last year of EEF members, which together account for almost a million workers, found they were looking for a rate of 67p to 70p, or DM2.80 to DM2.90.

Economists said the pound had been falling for some weeks on the back of speculation over the Government's plans for euro membership. Adam Cole, at Crédit Agricole Indosuez, said: "I think this is a euro convergence story. Investors have been putting a higher probability on euro membership."

But he warned the pound would "snap" higher again if the markets believed the Government, which must decide by next summer whether the economy has converged with Europe's, is lukewarm on the issue. Mr Radley agreed, saying: "If the Government wants to give businesses support on this issue it has to take the lead."