THE pound has fallen below 99p sterling for the first time in almost two years. As the British currency remains strong on the foreign exchange markets, the pound closed at 98.98p sterling, amid forecasts that it could edge even lower in the weeks ahead.
Sterling is being supported on the markets by a view that British interest rates are set to rise over the next couple of months. The British currency gained in trading over Christmas week and, while it ended only slightly higher yesterday, the pound drifted down.
With no sign of the Central Bank intervening to support the pound, the Irish currency closed below 99p sterling for the first time since February 1995. Dealers said trading in Dublin was quiet, but believe that the pound could fall further against the British currency.
"The pound is set to remain under pressure against sterling," commented Mr Jim Power, chief economist at Bank of Ireland treasury, who said that expectations of another half point rise in British interest rates over the next six months were set to support sterling.
He also believed the deutschmark may remain relatively weak, as investors investigate the likelihood of monetary union going ahead and the Dmark being merged with other currencies.
While the pound is weak against sterling, it remains at its highest level since the January 1993 devaluation against the deutschmark and the other ERM currencies. It closed yesterday at DM2.6054.
The latest trends on the currency markets will not be welcomed by the Central Bank. It may fear that the weakening of the pound against sterling could help fuel inflation, although economic opinion is divided over whether it is the pound/sterling rate which has the biggest impact on inflation or the overall value of the pound against the basket of currencies we trade with.
On the latter measure, the pound remains strong, with the rise against the other ERM currencies and the dollar offsetting the fall against sterling.
However, another difficulty for the Central Bank is that to qualify for monetary union the pound is meant to have traded stably for two years in the ERM.
While it is not clear how this definition will be interpreted and the pound would be unlikely to be excluded because of recent moves - the bank would prefer to see it trading more closely to the deutschmark and the French franc in the band.
At the moment it is more than 8 per cent above these currencies, which together are expected to form the core of the single currency.
Sterling continues to show strength and is ending the year firmly," said Mr Brian Hilliard, chief economist at Societe Generale Strauss Turnbull.
The pound is benefiting from "better economic conditions in the UK than in continental European countries", the economist explained.
Hence there are widespread anticipations of a rise in British interest rates, which are helping the pound. Numerous London analysts expect a tightening of monetary policy before the general election is due by next spring.
