Signs of recovery push sterling above DM2.50

THE POUND closed above DM2.50 for the first time in 14 weeks yesterday, but its strength helped depress share prices by fuelling worries that it would weaken demand for exports, writes Robert Chote.

Sterling ended the day two-thirds of a pfennig higher at DM2.5002. It has been gaining strength steadily as the emergence of 'green shoots' has convinced dealers that another cut in British interest rates is increasingly unlikely. Cuts in German interest rates - followed by other European central banks - have made sterling- denominated assets relatively more attractive. The mark was helped yesterday by Boris Yeltsin's success in the Russian referendum.

The pound closed 0.3 points higher against an index of other currencies at 81.5 per cent of its 1985 value, falling back from its high of 81.6 per cent as traders took profits.

The pound is now about 5 per cent stronger on this basis than was assumed in the Budget economic forecasts. This suggests extra downward pressure on inflation, but also implies that British-made goods are less attractive in international markets.

Fears that the stronger pound will hinder exports helped to depress the stock market. The FT-SE index of 100 leading London shares closed 21.5 points lower at 2,822.3. The market was little moved by figures showing a 0.2 per cent rise in Britain's gross domestic product in the first quarter of the year. The figures were slightly below market forecasts.

The European exchange rate mechanism had a relatively quiet day, with the Spanish peseta avoiding the severe selling that forced European central banks to launch a coordinated support-buying operation on Friday. The Bank of Spain was rumoured to have been intervening to support the peseta during the morning, but refused to comment officially.

Yesterday also saw the gold price advance to a six-month high in London. It was fixed at dollars 348.55 per ounce, and touched dollars 350 at one stage, its highest since early October. The price was boosted by the weak US dollar and buying in the Far East. Gold shares also advanced strongly.

View from City Road, page 26

Hamish McRae, page 27

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