French vote draws dealers to desks for bloody Sunday

The City's foreign exchange dealers are preparing to open for a full day's business next Sunday in anticipation of a currency crisis if French voters reject the Maastricht treaty in the country's referendum.

Many of the biggest international banks have decided to man their foreign exchange desks throughout the day and during the night. A 'no' vote is expected to trigger a surge of mark buying, as investors and speculators rush to the German safe-haven currency on the expectation that progress to the European single currency will have been derailed. But dealers also fear that a 'yes' vote may not relieve the pressure on sterling and the lira, the weakest currencies in the exchange rate mechanism.

Most of the leading British banks will have dealers standing by, although Midland said it had still not decided whether to open its dealing room. Citicorp plans to double its usual overnight skeleton staff, while dealers at other foreign institutions will also be manning their telephones during the night.

Voting will have closed throughout France by 7pm British time, with exit poll predictions following almost immediately. A firmer idea of the result is expected within the hour unless the vote is exceptionally close.

The markets have become increasingly nervous that a 'no' vote would trigger a realignment of the ERM, the first for five years. But a devaluation of the lira is regarded as almost inevitable irrespective of the outcome of the French vote. The German and Italian central banks have spent billions of lire over the last few days in a futile effort to lift the stricken currency from the floor of the ERM.

The markets fear that once the logic of realignment is accepted in the case of the lira, pressure on the pound to follow suit will become almost unbearable, as international investors and speculators rush to sell sterling. The pound fell against the mark every day last week, closing on Friday less than a pfennig above its permitted floor in the ERM.

Despite the imminence of the Maastricht vote, the markets are increasingly focusing on the economic fundamentals of individual countries within the ERM. The currency markets are rapidly losing hope of Italy being in a fit state to be part of a monetary union. Sterling will inevitably suffer if the markets decide the UK economy is fundamentally weak.

Economists are particularly worried by the pound's failure to gain strength from the rising dollar during the second half of last week. Sterling's recent weakness has been partly attributed to the weakness of the dollar. The US currency's rise was triggered on Wednesday evening by comments from Wayne Angell, a US Federal Reserve governor, that the currency was 'extremely undervalued'.

Some dealers, however, are doubtful about a lasting revival in the dollar's fortunes. George Magnus, an economist at Warburg Securities, said: 'It is not certain this is the turning point for the dollar.' He added there was no firm sign yet that the interest rate differential between the US and Germany was about to narrow.

Sterling could come under additional pressure this week from a raft of downbeat economic indicators. Manfacturing output for July, due on Thursday, is forecast to be flat on the month, while unemployment is likely to show a rise of 25,000 in August following a 29,000 rise in July. Retail sales figures for August, due on Wednesday, are expected to be weak following last week's pessimistic distributive trades survey from the Confederation of British Industry.

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