Dollar hits 11-year low against sterling

THE POUND was worth exactly dollars 2 when trading ended on the London foreign exchange market last night, the first time the US currency has closed this low against sterling for more than a decade.

The pound strengthened by 1.8 cents during the day, but the main beneficiary of dollar weakness was the German mark. The pound fell by just over a pfennig against the mark to DM2.7836, its lowest since joining the exchange rate mechanism. It is now barely half a pfennig from its floor in the system and nearly 17 pfennigs adrift of its central rate.

The dollar fell by 1.5 pfennigs against the German currency to DM1.3915, a fresh low since the creation of the Deutschmark in 1948. The dollar's close against sterling was its lowest since 1981.

Trading was thin in the aftermath of the bank holiday weekend and the pound's plight was largely a sideshow to the dollar and mark.

The Bank of England lurked threateningly on the sidelines and the prospect of a repeat of last week's intervention deterred any vigorous selling of sterling. But the money markets assume that the Government will still have to raise interest rates by half a percentage point to 10.5 per cent.

Tensions within the ERM were felt most keenly by the Italian lira. The Italian and Belgian central banks intervened to prop up the lira against the Belgian franc, the strongest ERM currency.

The mark - and closely linked currencies such as the Belgian franc - are being boosted by fears that the ERM could be fatally undermined in 18 days' time by a no vote in the French referendum on the Maastricht treaty on European union. A poll released yesterday showed opinion evenly split, following several showing a small lead for the no campaign.

But the main reason for the mark's strength is that interest rates are nearly 7 percentage points higher in Germany than in the US and the gap threatens to widen further.

The dollar drifted below the psychological barrier of DM1.40 during the morning, but briefly bounced back on rumours that the US Federal Reserve had intervened in Europe to support the currency. A crop of US economic indicators was seen as increasing the possibility that the Fed might cut interest rates again to boost the sluggish US economy.

US construction fell by 0.6 per cent in July to a seasonally adjusted annual rate of dollars 422bn (pounds 211bn), the sharpest drop for seven months, according to the Commerce Department.

The National Association of Purchasing Managers index fell to 53.7 per cent in August from 54.2 per cent in July, suggesting slower growth in US manufacturing industry. The Commerce Department's leading index of economic activity showed a small rise in July following a fall in June.

The gloomy outlook for the British economy was reflected yesterday by a Treasury survey showing that City and academic economists have become markedly more pessimistic over the past month about the likely depth of recession this year.

The average forecast of independent economists is for national output in 1992 to be 0.6 per cent lower than last year, compared to the 0.2 per cent drop expected in July. A year ago the average independent forecast of 1992 growth was 1.9 per cent. They have become more pessimistic month-by-month since October.

The average forecast for growth in 1993 has been cut back sharply in the past month, from 2 to 1.6 per cent. For the first time independent forecasters now expect unemployment to hit 3 million in the fourth quarter next year.

Forecasts of slower growth are accompanied by greater optimism on inflation, with the annual rate of increase in retail prices expected to be 3.7 per cent in the fourth quarter this year, falling to 3.1 per cent in the fourth quarter of 1993.

But analysts are becoming increasingly worried about the scale of public borrowing. The public sector borrowing requirement is expected to reach pounds 32.4bn this financial year, rising to pounds 37.9bn in 1993/4.

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