Further fall in euro adds to rates pressure

Sterling soared yesterday to its highest level since December 1985, in the mirror image of a meltdown of the euro on the foreign exchanges. The euro fell to a fresh all-time low against the pound and dollar, in a dive expected to make a further rise in European interest rates more likely tomorrow.

Sterling soared yesterday to its highest level since December 1985, in the mirror image of a meltdown of the euro on the foreign exchanges. The euro fell to a fresh all-time low against the pound and dollar, in a dive expected to make a further rise in European interest rates more likely tomorrow.

The further gain in the pound will add to the already painful pressure on UK exporters. It also intensifies the dilemma faced by the Monetary Policy Committee, which must weigh up the weakness in manufacturing against continuing buoyancy in services when it meets next week. The evidence on the economy in the past month has been mixed.

The pound's index against a range of currencies leapt to 111.4 yesterday from a previous close of 110.4. In relatively quiet markets, with many traders still on holiday, the euro fell as low as 58.62p. Against the US dollar it fell to 92.32c, down from the previous day's low of 93.54c and corresponding to a 14-year low for the Deutschmark against the dollar.

Analysts were at loss to explain why the flagging euro should have fallen so sharply. "It is hard to predict what will happen next when there was no particular reason for it to slide," said Alison Cottrell, chief economist at PaineWebber.

She added it was nevertheless unlikely that there would be an improvement in market sentiment towards the euro until some bad news about the US economy started to emerge.

Stephen King, chief economist at HSBC Markets agreed that the currency moves mainly reflected confidence in the US. "Clearly there are uncertainties about European Central Bank policy, but the key is the continuing belief in the marvels of the American economy," he said.

There seems little chance this faith will be undermined soon. Figures due this week are expected to show that US growth is still running at a near-miraculous 5 per cent or more, and another US interest rate increase is expected in mid-May.

"So far US stockmarket volatility has not taken the shine off the dollar," said Razia Khan, an economist at Standard Chartered Bank.

However, the euro was also undermined by reports that leading German economists had cast doubt on the prospects for a pick-up in the currency. Norbert Walter, Deutsche Bank's chief economist said in a TV interview yesterday that no recovery was in sight.

In addition Jürgen Donges, head of the government's council of five independent economists, said the German public was losing confidence in the European currency.