EMU turmoil hits Deutschmark

The Deutschmark and, to a lesser extent, the French franc took a battering on the foreign exchanges yesterday as dealers concluded that the outcome of the French elections paved the way for a broadly-based single currency with a further fudging of the criteria for entry.

However, some commentators forecast that the return of the left to power in France and continuing turmoil in Germany could force a postponement altogether of the 1999 starting date for economic and monetary union, possibly within the next few weeks.

In London, the dollar made strong gains against both the German and French currencies, as did sterling which was bolstered by speculation of a base rate rise later this week following strong manufacturing output figures.

The pound climbed three and a half pfennings to reach DM2.8247 while it put on nine centimes against the French franc to hit Fr9.5261. Meanwhile the deutschmark also lost ground to a range of Continental currencies including the franc, lira and peseta as European bond markets held steady.

The prevailing view in the foreign exchange markets was that the Left's victory in France would spell a softer EMU with both Italy and Spain qualifying for early entry. Robert Lind of ABN Amro, said: "That does have serious implications for the deutschmark, at the moment dealers perceive it as a dying currency. Rather than worrying about EMU blowing up the market has decided that the French election result means a much more broad-based EMU with a soft centre."

He added that attempts to talk up the risk of a delay had been overdone. However, in the current state of uncertainty, others were more concerned that a delay now looked more likely. Alison Cottrell, chief international economist at Paine Webber, said that the risks to EMU starting in 1999 had risen immensely in the past fortnight. The "central case", she added, had now shifted from EMU starting with a narrow band of countries to a delay in its launch.

Robert Prior of James Capel said: "This is a further nail in the coffin of a credible and firm start for EMU in 1999. We are left with an EMU that permits wide membership and lack of credibility." He also cautioned that the markets had not fully priced in the risk of delay.

Julian Jessop of Nikko Europe said: "The markets are nervous and split evenly between those who believe EMU will go ahead but on a diluted basis and those who don't think it will happen. People are waiting for the next decisive move one way or another. My view is that the project will blow apart but not until next year."

Although both the German and French equity markets rebounded to end the day showing gains, there was a widespread sentiment that Europe was, as one dealer put it, "not the place to be. There have to be less risk places to put your money."

David Marsh of Robert Fleming Securities, said that a decision to postpone EMU "now looks increasingly likely - possibly in the next few weeks".

Although the pound benefited from its recently-acquired "safe haven" status alongside the dollar and the Swiss franc, London shares failed to ride the same wave, the FTSE100 Index falling 58.5 points to close at 4,562.8.

The London market took its cue partly from Wall Street where the Dow fell back in early trading but dealers also speculated that strong figures from the latest Purchasing Managers Index could point to an increase in interest rates. Rising orders, faster output growth and a further increase in employment took the PMI Index to a two-year high in May. Simon Brisco of Nikko said: "The direction of this survey and other evidence from the last month suggests that the growth of the economy has continued. The pressure remains for higher rates on Friday."

Market report, page 22

Hamish McRae, page 24