Anatomy of a rumour: Goodbye to the pound?

The stock market index had its biggest ever one-day jump yesterday. The pound nose-dived. Why? Because of ... nothing, just a newspaper rumour, just a whisper in the corridors of power, about Britain and the single currency. Anthony Bevins and Diane Coyle ask what this tells us about the fate of the pound.

It was a bland, straightforward-looking story in the Financial Times. It suggested that the Cabinet was leaning towards British membership of the European single currency. No one was named. No startling information was revealed. But it was what the City wanted to hear, and the whooping could be heard all the way from the Square Mile to Westminster.

The FT's suggestion was that while sterling would not go into the single currency in the 1999 first-wave, there could be a declaration of intent to join, possibly before the next election. A statement outlining the conditions would be made to Parliament next month. It could be so. It might not be. The Cabinet was, and still is, vaguely in favour of joining at some time, if the single currency works. But there have been no other signs of Tony Blair closing off his options so early.

Certainly, yesterday's report did not come from him. Alastair Campbell, the Prime Minister's press secretary, speaks with some contempt for the man who wrote the report, Robert Peston, political editor of the Financial Times. The son of Lord Peston, Mr Campbell refers to him sarcastically as "The Rt Honourable".

For the record, the Prime Minister's office said the Financial Times report was "speculation, but wrong. There is no change in Government policy."

That is precisely what Mr Blair said in his interview with The Independent earlier this month. These days, the Treasury tends to be even blunter. There it was variously described as "bollocks'' and ``crap''.

The spokesman added that Gordon Brown, the Chancellor of the Exchequer, was scheduled to make a statement before the end of the year. It was widely expected he would reject first-wave entry, for 1999. "But I don't know what he is going to say after that, and I don't think he does either," the spokesman said.

But no denial would have damped down the excitement of the markets, which wanted to believe that the report was right. One seasoned City observer said: "This was a no-downside leak. There is no official change in policy yet, but a much more positive spin which has been really helpful in terms of the pound."

Gavyn Davies, the chief economist at investment bank Goldman Sachs who is close to Mr Brown, said: "There is no doubt in my mind that the Government will move us from strictly on the fence to off the fence but with flexibility over the timing."

He said the Government had clearly been moving in the direction of a more positive policy towards membership.

Gerard Lyons, head of research at investment bank DKB, voiced the widely held view in the City when he said: "Emu membership is now regarded as a done deal. The Government is seen to be testing the waters ahead of the party conference next week."

Share prices went through the roof, with the FTSE-100 index soaring by 161 points to 5,226.3. This was - in absolute terms - its biggest-ever jump, rivalled only by a 136 point rise when the Conservatives won the 1992 general election.

The pound fell by four pfennigs to DM2.83, the lowest since Labour's election victory in May.

So the Government is saying "maybe'' and the City is saying "good''. But what of the Tories, whose agonies over the issue helped cripple them in government and contributed mightily to their electoral massacre in May? Yesterday they too changed their position - and did so firmly on the record, in a press release from Central Office.

Peter Lilley, the shadow Chancellor, condemned the Government's reported position on the single currency as "bizarre" and added: "Conservatives are pragmatists, and if the facts were to change, we would have to consider them very carefully."

That may sound bland: but William Hague stood for election as Conservative leader on a pledge that he would lead the party into the next election on a platform of not going into a single currency for the duration of another Parliament; ruling out membership of a single currency under the Conservatives for as long as a decade.

So, on a day when the Westminster rumour machine blew straight into the excitable and rumour-prone world of the markets, what conclusions can safely be drawn?

The simple truth is that we are much likelier to join the single currency than we were a few months ago, under the last government. The political pressures against joining, both in the Commons and in the country at large, have fallen back.

The City has virtually made up its mind. If Chancellor Helmut Kohl, the often written-off German Chancellor is watching, he could be forgiven for thinking that his moment has come.

On the other hand, if Mr Blair changes his mind, at least nothing is yet on the record.