The pound has dropped sharply on the currency markets, as international investors reacted to reports from London that the British government was becoming more positive about EU monetary union. The news drove sterling sharply lower against other European currencies and the pound fell with it, although the Irish currency did recover some ground in late afternoon trading. A report in yesterday's Financial Times, suggesting that the British government could signal an intention to join monetary union not too long after its January 1, 1999, start date, sent the British currency sharply lower. This is because investors reckon that if sterling joins it will do so at well below its currency trading level. The Irish pound fell in tandem with sterling, losing over four pfennigs at one stage before recovering some ground to an official close of DM2.5699, a little over two pfennigs down on Thursday. In afterhours trading the Irish currency recovered to around DM2.5730.
Dealers in Dublin said that once the currency hit around DM2.55, Irish companies say the pound as good value and started to step into the market to purchase it. After an extremely heavy and volatile days trading, some analysts believe that the Irish currency may not fall too much further in the short term against the other ERM currencies, as it is now close to a level at which the Government might be happy to lock into monetary union. The Government gilt market in Dublin also benefitted, with long-term interest rates easing back. Investors are anticipating that short-term interest rates in Ireland will converge with those in Germany by the time monetary union commences. This should mean a fall of 1.5 percentage points or more in Irish borrowing rates - much of which should pass on to mortgage rates. However analysts believe that the Central Bank here will do its best to stop rates from falling until next year.
The market excitement yesterday followed the disclosure in the Finan- cial Times that a government statement is expected this autumn indicating that sterling is likely to join a European single currency at an early opportunity after the 1999 launch.
The official response to the disclosure from the Treasury was that it was "speculation", but there were no denials from ministers or their spokesmen.
Speaking in New York last night Robin Cook, the UK foreign secretary, said the decision on whether to be "in the first phase" of monetary union would be taken "at the turn of the year". One of his senior colleagues said that although that was the formal position, there was "no chance in practice" of sterling joining in 1999.
However, Mr Cook conceded that "in the longer run, if the single currency proceeds and if it succeeds, Britain would have difficulty in staying outside".
Senior ministers are increasingly persuaded that this means sterling must join by 2002, when notes and coins are converted into the new currency.
"A referendum in 1999 for entry shortly afterwards is a distinct possibility," said a minister.
A Reuters poll of analysts found that the average expectation for sterling's entry level for the new currency was DM2.60. (additional reporting by Financial Times)
