THE Central Bank is facing new difficulties in the currency market after a further in sterling pulled the pound to its highest level in four years against the deutschmark. The pound is now trading at the same level against the German currency as it was before the devaluation in January 1993. But it has slipped further against sterling.
Sterling gained strongly on the markets yesterday and the pound dropped to 98.21p from 98.48p. However, the Irish currency is continuing to rise in the ERM band, gaining almost a pfennig yesterday to close at DM2.6207.
It is the first time the pound has regained the level at which it was trading before the January 1993 devaluation. Early yesterday, it traded, as high as DM2.6240, above where, it was on the last trading day before the devaluation. One reason for its rise against the deutschmark was a decline in the German currency after figures showing a rise in unemployment and a 3.9 per cent budget deficit for 1996, well above the 3 per cent Maastricht ceiling.
The Central Bank may be worried that the fall in the pound against sterling could fuel inflation by pushing up import prices. However, it will be equally concerned about the rise in the ERM. The pound is now well detached from all the other currencies in the band and is trading almost 9.4 per cent above the French franc, which is at the foot of the band. It is 8.7 per cent above the deutschmark. This is not likely to breach the Maastricht rules, but it does highlight the link between the pound and sterling. All the other currencies which are likely members of the initial move to monetary union are trading close to each other in the ERM band.
Meanwhile, market forecasters predict sterling is set to rise further, worsening the Bank's difficulties.
The British currency rose sharply, an early trading yesterday, pulling the pound up in its wake against other ERM currencies. However, market sources said some sellers, emerged as the pound rose well above DM2.62.
Sterling is being supported by speculation that inflationary fears will lead to an increase in British interest rates. Attention will now focus on next week's meeting between Mr Kenneth Clarke, the Chancellor of the Exchequer and Mr Eddie George, the governor of the Bank of England. If the two do not agree a further rise in British interest rates, sterling may lose some ground.
The deutschmark may continue to remain weak after the latest figures painted a picture of a weak economy and raised speculation that German interest rates could edge lower in the months ahead.
A New Year press conference by German Chancellor Dr Helmut Kohl coincided with news that unemployment in Germany rose in December to a seasonally adjusted post war record of 4,156,000, a level he called "completely unacceptable", and that the economy had stagnated last quarter.
Germany's 1996 budget deficit also rose to 3.9 per cent of gross domestic product (GDP), casting doubt on Bonn's ability to reach the 3 per cent ceiling this year to qualify for Dr Kohl's flagship project of an EU single currency.
But Dr Kohl told reporters. "If I look at Germany and feel pessimistic, I have to ask what country we're living in . . . I can't see why I should be pessimistic."
The Bundesbank central council met yesterday, but did not changes to interest rates All attention today will focus on the latest us employment figures, which will influence the value of the dollar and thus the other major currencies.
