The pound jumped over a penny against sterling yesterday and gained slightly against the deutschmark as the British currency came under pressure ahead of the next decision on interest rates. Fresh talk of revaluation also helped boost the pound, although there was some division among commentators about whether this is likely.
Sterling lost more than four pfennigs as doubts crept into the market that the Bank of England's monetary committee would act to raise rates for the fourth month in a row. Sterling fell towards 3 deutschmarks, closing at DM3.0179 from DM3.0563 a day earlier.
Analysts said sterling's strength is not only hurting exporters but also damaging the competitiveness of UK service providers. Traders said there is mounting concern at the general strength of sterling, which reached DM3.0878 in late July, its highest since August 1989 "The market is getting very nervous and is starting to take profits," said Mr Lee Ferridge, currency strategist at Commerzbank in London.
Sterling's weakness sent the London stock market to a new record high with the FTSE index of the leading 100 stocks soaring through the 5,000 level for the first time. The index eventually closed up almost 66 points on 5026.2.
Meanwhile, fresh revaluation rumours emerged around the pound. Reuters carried two stories on a possible revaluation, while the pound closed at 89.65p against sterling from 88.24p but managed to hold on to its gains against the deutschmark closing at DM2.7005 from DM2.6971 on Tuesday.
Mr Jim O'Leary, chief economist at Davy Stockbrokers, said the revaluation stories may have lent some support to the pound against the mark. If it had followed recent trends it would have fallen about 2.5 pfennigs yesterday, he noted.
Nevertheless, Mr O'Leary, in common with many other commentators, is sceptical of any near-term move to revalue the currency. He pointed out that the Reuters stories probably have more to do with a slack August news season than any immediate inspired leaks from Europe.
Nevertheless, today could prove vital. Inflation and credit data will both be released this afternoon and a stronger than expected figure for either could start off the revaluation rumours once again.
Indeed, Mr Eunan King, economist at NCB Stockbokers, said it is precisely to ward off the inflationary danger that the authorities should consider revaluing the currency.
The inflationary dangers of falling significantly against the mark and other European currencies over the next 18 months are obvious, according to Mr King.
"It would be much easier for the authorities to revalue when the currency is not under siege from speculators," he noted. "This would also allow interest rates to fall, putting us on path to monetary union."
He added that credit growth should not have an impact on the argument. "The only way credit growth can impact on inflation is though the balance of payments," he said, "and there is no sign of that yet." At least 6 or 7 percentage points of the credit growth can be explained by fundamental demographic factors such as the growth of young people returning to the labour force and buying new houses, he explained.
