Pound rests on laurels as profit-takers pounce

THE SURGING pound ran out of momentum yesterday, failing to make a sustained break through DM2.50, but still ending the week with a gain of 7 pfennigs.

The pound rose strongly when trading opened yesterday, continuing a rally fuelled by glimmers of economic optimism in Britain, a weak German mark and the squaring of short sterling positions before the year-end. But profit-takers pulled the pound back from DM2.50, closing at DM2.4847.

The pound was also unable to make progress against the dollar, which was boosted by upbeat employment data in the US. Sterling closed almost unchanged at dollars 1.5635. Against a basket of currencies, the pound ended 0.2 points higher at 80.7 per cent of its 1985 value.

The weakness of the mark continued to alleviate pressure on the exchange rate mechanism. The Franco-German summit in Bonn reaffirmed the countries' determination to maintain the franc's bands in the system. A joint statement said: 'As far as the exchange rate mechanism of the EMS is concerned, the ministers welcomed the successful co-operation of the central banks of both countries, which has fully proven itself.'

Norman Lamont, the Chancellor of the Exchequer, said the rise in the pound reflected greater 'confidence in Britain's future'. He told the Wall Street Journal that falls in the pound would weaken the prospect of British inflation remaining low. But the Treasury denied that Mr Lamont was drawing a line in the sand below which he would not be prepared to see the pound fall. The exchange rate remained just one of a number of important indicators to guide policy, it said.

A further tentative sign of revival in the economy emerged from the Central Statistical Office's cyclical indicators. The coincident indicator - which combines Confederation of British Industry survey results with official data on output and sales to indicate the current strength of the economy - rose for the sixth successive month to its highest level since April last year.

But the shorter leading indicator - which predicts the strength of the economy around four months in advance, using CBI surveys, credit figures, profits and new car registrations - has been falling for the past three months, suggesting that any current revival might be built on sand.

Stephen Dorrell, financial secretary to the Treasury, said it was 'simply plain common sense that it is reasonable to expect things to get better next year'. 'I think there is very clear evidence, not that there is a full-blown recovery under way - we all know that's not true - but that confidence is improving,' he said.

Housebuilding figures for October gave little encouragement, however. In the three months to October some 36,700 houses were started in Britain, adjusted for regular seasonal factors. This was 7 per cent down on the same period of 1991 and the lowest figure for over a decade. House completions were up 1 per cent on the quarter.