Gamble on rising European rates puts mark in demand: US bond market helped by unexpectedly soft inflation data

THE MARK surged higher on the foreign exchanges yesterday, amid a growing conviction that European interest rates are heading up again. But bond prices were helped by unexpectedly benign US inflation figures.

The pound fell by more than 2.75 pfennigs against the mark during London trading to close at DM2.4017, but rose by 0.75 cents against the dollar to dollars 1.5463. The mark's ascent was part of the continuing aftershock that followed Thursday's rises in Swedish and Italian interest rates.

The London stock market headed lower, with the FT-SE index of 100 leading shares down by more than 28 points at one stage. But the US inflation figures prompted a rally in thin trade, leaving the index 4.1 points up at the close at 3,142.3.

The lira again fell to record lows in response to the Bank of Italy's botched attempt to defend it, dropping to 1,030 against the mark at one stage. Italian debt futures extended Thursday's losses as news that the Italian government's tax revenue was 3.7 per cent lower between January and June than a year earlier reinforced worries about its ability to take tough action on the budget.

Swedish bonds fell to their lowest level of the year, with international investors fleeing after Thursday's unexpected rise in interest rates. The Swedish krona fell below five to the mark. As other Scandinavian markets felt the draught, the Finnish central bank intervened to support the markka and held down short-term rates.

American consumer prices rose at an annual rate of 4.1 per cent in July, in line with the forecasts of many economists but still fast enough for most to predict a rise in US interest rates next week.

The consumer price index rose by 0.3 per cent for the second consecutive month, bringing the annual rate of inflation to 2.7 per cent so far this year. Excluding volatile energy and food prices - which jumped on sharply higher petrol and coffee prices - the core inflation index rose by 0.2 per cent.

A record 22.4 per cent increase in the coffee price index reflected recent frosts in Brazil, but economists are more worried about the 1.8 per cent increase in energy costs, the result of a rise in oil prices to dollars 19 a barrel from dollars 15 in March.

The numbers were welcomed by the bond market in the US, where the price of the long bond jumped by half a point, to yield 7.5 per cent.

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