Franc unscathed as French cut loan rates: Yen soars after Clinton comments

THE BANK of France reduced two of its key interest rates yesterday, helping to relieve pressure on the struggling French economy. The franc survived unscathed, closing more than five centimes above its floor in the European exchange rate mechanism at Fr3.3783 to the German mark.

The Bank of France reduced its intervention rate, the floor for market rates, from 9.1 to 8.75 per cent. The five to 10-day lending rate was cut by a quarter point to 9.75 per cent. Call money eased to around 9.3 per cent.

The gap between German and French official rates is now 1.25 percentage points, with the gap between three-month rates at 0.75 points. Marie Owens Thomsen, economist at Midland Global Markets, said official French rates could be cut by a further half point without endangering the franc, although call money would probably have to fall to around 9.2 per cent first.

The French move had little impact on the ERM. The pound was also quiet, rising 0.1 points to 80.1 per cent of its 1985 value against a basket of currencies. The gilts market was livelier, with many of Friday's losses at the long end being recouped.

The yen soared against the dollar and other currencies after President Bill Clinton said he supported a strong yen last Friday. The yen closed in Tokyo at Y111.00 to the dollar and Y111.15 in London.

The yen, which started the year at Y125 to the dollar, has been gaining value steadily for the past month, but President Clinton's explicit endorsement of a strong yen at a joint press conference with Japan's Prime Minister, Kiichi Miyazawa, last week, took the markets by surprise.

Yesterday's steep rise in the yen, however, and the prospect of further gains, was criticised by the Japanese government. But economists say it is in a weak position to stop the yen rising further, with little international sympathy for the difficulties this causes for Japan's exporters.