Euro passes the first market test

CITY traders who turned up for work yesterday found themselves twiddling their thumbs as European financial markets gave a muted reaction to the weekend's "ECB presidency fudge".

European stock markets surged following Friday's rally in the US, but currency markets - the key barometer for market opinion on the euro - remained steady.

Following the decision to split the presidency of the European Central Bank (ECB) between Wim Duisenberg of the Netherlands and a French nominee, the pound was up a pfennig or so in early trading, but fell back to DM2.967, virtually unchanged from Friday.

Avinash Persaud, global head of currency research at JP Morgan, said: "The weekend's activity has delayed the rise in the mark against sterling, but the mark has not been derailed."

Many of the City workers who sacrificed a day's holiday to come into the office packed up early as the turmoil in the markets predicted by some failed to materialise.

One analyst, speaking on his mobile phone at lunchtime, having left the office for the day, said: "There's not much happening. People were sat around with not much to do."

Of the London markets, only Liffe, the London financial futures exchange, was open for trading yesterday. However, analysts predicted there would be little change in the sterling-mark rate when UK trading recommences today.

Mr Persaud said: "New York is open, and the Anglo Saxon perspective will have filtered into the market by the end of the day."

Analysts said two forces were pulling the sterling-mark exchange rate in opposite directions, meaning the pound was likely to remain unchanged over the next few days. Uncertainty over the euro, heightened by the weekend's prevarications on the presidency of the European Central Bank, tends to bolster sterling, seen in certain quarters as a "safe haven". However, many analysts now expect the core euro countries, led by the Bundesbank, to push through a rate rise sooner rather than later in an attempt to restore the harm done to their anti-inflationary image by the weekend ECB compromise.

One trader at a German bank said: "The ECB deal has raised speculation that Germany might raise rates sooner or more aggressively, and that's boosting the mark." In early trading in the US, the mark was trading strongly, at DM1.78 to the dollar.

Not all analysts subscribed to the theory that the weekend's compromise equalled monetary tightening in Germany. Graham Bishop, EMU adviser at Salomon Smith Barney, said: "The Bundesbank will monitor domestic German developments, and we don't expect a tougher policy because of this."

Yesterday's surge in the European stock markets was largely attributed to positive sentiment following last week's rally in the US Dow Jones Index, rather than reaction to events in Brussels. "The row over the presidency is seen as a currency market story, not a stock market story," one analyst said.

The French market closed up 2.5 per cent, the German market up 2 per cent, and the FTSE Ebloc 100 - Europe's first composite equity index for the EMU countries - finished its first day trading up 18 points at 1018.31.

Reaction in the bond markets was mixed, with sentiment initially damaged by worries over European interest rate rises, but recovering later in the day as fears of a US rate rise faded. Analysts predicted the UK markets, which re-open today after the bank holiday, would follow the pattern set yesterday by the rest of Europe, with sterling's strength likely to persist in the short to medium term.

The continued strength of sterling will be unwelcome news for UK exporters, whose difficulties were further illustrated by new figures from the Confederation of British Industry (CBI). The CBI/Pannell Kerr Forster survey reveals sharp falls in manufacturing orders received by small and medium businesses, and says that investment intentions are now their weakest for five years.