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Franc crashes to 3-month low

Paul Wallace Economics Editor
Friday 06 October 1995 23:02 BST
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Economics Editor

The French franc tumbled on the foreign exchanges, losing 1 per cent of its value against the deutschmark and taking the franc to a three-month low against the German currency.

Worries about the political unpopularity of Jacques Chirac's government and its failure to square up to France's economic and fiscal problems led dealers to drive the franc down through the 3.50 level to close at 3.5075, its lowest point since the end of June.

The sense of crisis was heightened when the Banque de France suspended its 5-10 day lending window and reimposed its 24-hour lending rate at 6.15 per cent, a step the central bank has taken when the franc has come under pressure on previous occasions. The move was caused by a rise in three-month money rates from 6.375 to 7 per cent.

"The markets are testing the willingness of the French authorities to impose another debilitating increase in interest rates on the economy," said Kit Juckes, currency strategist at NatWest Markets.

Rumours about a resignation of the prime minister, Alain Juppe, ruffled the market, as it absorbed the latest polling evidence about the unpopularity of the Chirac government. A Sofres survey for Le Figaro on Thursday showed a massive decline in the confidence of voters in Chirac and Alain Juppe.

However, the principal reason for the renewed test of the franc fort was renewed scepticism about the ability of the economy to withstand the interest rate medicine necessary to tether the franc to the deutschmark.

"France is in the same devil's dilemma as the UK in September 1992," said Stuart Thompson, international economist at Nikko Europe.

"There is a growing crisis in France between the government's objective of meeting the Maastricht criteria for monetary union and the need to cut unemployment."

That crisis seems set to build on itself next week with a series of public sector strikes starting on Tuesday against the government's imposition of a pay freeze.

The measure has been introduced to help the government meet the spending cuts needed to meet with the Maastricht objective of a 3 per cent budget deficit by 1997.

The run on the franc was all the more striking in that it was not provoked by dollar weakness against the deutschmark, the usual reason for pressure on the currency.

The dollar ended the day at 100.80 against the yen and 1.4273 against the deutschmark, virtually unchanged against the previous London close on Thursday.

Fears that the US Employment Report would show weak growth in jobs - necessitating an early cut in interest rates and reducing the attractions of being in dollars - were abated by the growth in non-farm payrolls of 121,000.

Although this was somewhat less than the market had been expecting, jobs growth was revised up by 22,000 for July and 13,000 for August.

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