Overseas investors continued to sell pounds yesterday ahead of two crucial meetings on interest rates this week. Although the Irish markets were closed for the holiday weekend, dealers estimated that some £80 million was spent selling the Irish currency. The pound moved within a narrow range of 88.50p to 88.70p against sterling. Earlier, sterling strengthened to 3.0460 against the DM which took the Irish currency up to DM2.70. That prompted selling of the pound in "very thin" trading, dealers said. However, the focus of attention was on the dollar which surged to a four-year high against the Swiss franc, an eight-year peak against the French franc, and nearly a 12 year high against the lira on nervousness over German interest rates.
This pushed the pound down to 1.4450 against the dollar. At this stage, Irish corporates - mainly multi-nationals based in Ireland - began to buy the Irish currency, dealers said. Irish dealers were quoting a closing price of 88.65p against sterling, 1.4465 against the dollar and DM2.6950. Within the ERM the pound first strengthened from 12.30 per cent against the weakest currency, the French franc, to 12.50 per cent but later fell to 12.41 per cent.
Bank of Ireland economist, Mr Jim Power, noted there are three important factors which will influence the pound this week: domestic statistics, particularly the exchequer figures for the first seven months out today; the decision on interest rates by the Bank of England's monetary policy committee; and the Bundesbank's moves on interest rates.
The dollar's rise was also spurred by fears Germany's central bank would raise interest rates via its weekly repurchase rate tender, or money market operation.
Before the Bundesbank left for its four-week summer recess, it said it would hold 3 per cent fixed-rate tenders for two weeks. By not specifying the rates for the final two weeks of the holiday period, traders speculated the central bank might use a variable rate tender to allow rates to drift higher.
Though higher interest rates are normally supportive for a currency, traders feared higher interest rates in this instance would further stifle already weak economic growth and dent the Bundesbank's credibility.
"The question is how credible is such a move when domestic demand is relatively weak," said Mr Mark Geddes, treasury economist at ABN Amro.
Because of the ongoing debate about German interest rates, traders were not ready to sell deutschmarks without more clues on Bundesbank interest rate policy. So instead, they bought dollars.
Uncertainty about Bundesbank policy also rattled Germany's blue-chip DAX index. The DAX ended bourse trade down 111.85 points, or more than 2.50 per cent, at 4,296.94.
Eyes will also be on the Bank of England's monetary policy-setting meeting on Wednesday and Thursday.
A Reuters poll taken on July 30th showed 16 of 23 economists expected official British interest rates to rise 25 basis points after the meeting for the fourth rate rise in so many months.
Comments from Mr Howard Davies, days after he retired as deputy governor of the Bank of England that interest rates will go up, would seem to confirm this view, despite increasing pressure from British exporters who are complaining about the strength of sterling which is hitting their profits hard. Looking further ahead, Barclays economist, Mr Chris Wright, has warned that British interest rates will need to rise further to dampen consumer spending, even though it could push sterling even higher and, as a result, eat deeper into exporter's profits. He said interest rates should rise to about 8 per cent by early next year from the existing rate of 6.75 per cent in order to avoid the possibility of a resumption of an inflationary spiral and cyclical growth.
