Pound rises on ERM re-entry rumours

THE TREASURY yesterday denied rumours on the foreign exchange markets that the Government was about to spring a surprise on the world and take sterling straight back into the European exchange rate mechanism.

'We are not rejoining the ERM this weekend,' a Treasury spokesman said flatly. But in late trading the rumours helped to lift the pound, which had been depressed by John Major's unsuccessful attempt on Thursday to persuade the markets the Government possessed a coherent economic policy.

However, rumours also swept the foreign exchange markets that the remaining members in the system were planning a realignment this weekend, aimed at ending the market turmoil. According to this speculation, the French franc's rise in value yesterday had convincingly placed it in the inner core of hard currencies with the mark, Belgian franc and Dutch guilder. These would be revalued against the Spanish peseta, Portuguese escudo and Irish punt, the weakest members of the system.

More dramatic rumours suggested the deepening in monetary co-operation between Germany and France this week would form the basis for a monetary union of all the core currencies, to be announced this weekend.

Even though the franc appears to have weathered one of the most severe speculative attacks for years, economists worry that the currency turmoil may not be over. They expect that pressure on the weaker members of the ERM may be stepped up, and only a devaluation of these currencies against the core, or an early reduction in German interest rates, could take the speculative steam out of the markets.

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