The pound has risen against sterling amid expectations that the British government's enthusiasm for joining EMU will most likely mean a lower exchange rate for the British currency.
Sterling slipped against the euro and the dollar as traders bet that it would eventually enter the single currency at a much reduced rate than its current level.
Sterling's slide to its lowest level against the dollar in more than a year also helped push the euro down to fresh lows against the US currency.
The euro closed at 68.58p against sterling and at $1.0975 from 68.18p and $1.1000 on Tuesday. As a result the pound closed at 87.06p against sterling from 86.57p a day earlier.
The British Prime Minister, Mr Tony Blair, yesterday made his clearest commitment yet to taking Britain into the euro early in the next century by unveiling a National Changeover Plan to ensure the country is ready for participation in the single currency.
The Treasury has ruled out any shadowing of the euro prior to entry, refusing to get drawn into another ERM-type mechanism, given the debacle when the pound was forced out in 1992. However, sterling will still have to show it has been "stable" against the euro for two years prior to entry.
The British government is tight-lipped on what rate it would seek for entry. Sterling is trading at around DM2.86 but most investors believe it will enter the euro at not far above the pound's entry rate of DM2.48. This means it has to fall by as much as 12 per cent over the coming years. That translates to a level around 75p or 76p. The pound entered at 78.7564p and the Irish Government will be keen to ensure that we do not end up above parity against sterling.
Most economists expect sterling to weaken to 73p or 74p by the end of the year. However, they warn that, with the European economic outlook worsening, and Britain's economy looking like it was bottoming out, the forecasts were by no means assured.
The British Chancellor, Mr Gordon Brown's adviser Mr Ed Balls insisted yesterday that existing policies would be sufficient to deliver exchange rate stability. However, he acknowledged that sterling would require a period of stability prior to entry.
One problem for the British authorities is that a very strong sterling will make it much more difficult for them to argue for an effective devaluation and the debate could be long and heated.
With a referendum now pencilled in for early in the next parliament and an election due in 2001 or 2002, Britain could be joining as early as 2002. So if the government wants to go in at 75p, sterling needs to get down towards that level over the next year or so.
Meanwhile, the Small Firms Association yesterday described the British government's approach as "very positive".
SFA director, Mr Pat Delaney, said it could mean an easing in sterling which would reduce fears of "bought in" inflation here.
However, traders said sterling looked vulnerable to further losses amid continued dollar strength which has driven the British currency down nearly 4 per cent this year, although the euro has lost as much as 8 per cent.
As well as the Blair administration's new enthusiasm for the euro, analysts pointed to the larger than expected trade deficit and the sluggish pace of its economic growth which contrasts with rapid US expansion in the last three months of 1998.
The London stock market finally shook off the effects of last autumn's plunge in share prices, as, helped by stronger EMU sentiment, the FTSE 100 index surged to an all-time closing high yesterday. The blue-chip index jumped 152.4 points, or 2.5 per cent, to 6,307.6. Its previous peak of 6,179.0 came in July last year before the Russian debt default, the near-collapse of Long Term Capital Management, the US hedge fund, and worries about a UK recession pushed the index down to 4,648.7 by early October.
The market has also been building up a head of steam in recent weeks as the Bank of England's interest rate cuts and encouraging economic data have persuaded investors that Britain can avoid a recession this year.
--(Financial Times Service)
