Sterling and dollar plunge in market turmoil

Currencies: Political troubles in France and Italy spread turbulence through foreign exchange, bonds and equities

The markets were thrown into turmoil yesterday, with investors rushing to the safe haven of the German mark amid political fears in France and Italy. Both sterling and the dollar plunged close to all-time lows against the currency.

The renewed currency turbulence spilled over into European bond and equity markets, with German shares suffering particularly on fears of the impact of a strong mark on big exporting companies.

The pound closed in London at DM2.1857, two pfennigs down on the day and only a pfennig above its all-time low of DM2.1768 in early May. The dollar closed at DM1.3823, two pfennigs above its low of DM1.3620 in the spring. It also fell to just under 100.

"We're back in a situation in which weakness in one European currency is spilling over to affect another," said Steve Barrow, currency analyst at Chemical Bank.

The French franc hit a five-month low, losing more than a centime, to close in London at DM3.532. It too was affected by signs of political weakness, centred on a request for the state prosecutor to investigate President Jacques Chirac over a flat he rented at cheap rates.

The main loser of the day, however, was the Italian lira, which weakened 2 per cent from L1,145 against the mark on Friday evening to L1,170 at the close of London trading.

The lira came under pressure amid worries about a no-confidence vote on Thursday that could pull down the technocrat administration of Lamberto Dini. Even if the former central bank governor survives, the fear is that he will have difficulties getting the 1996 budget through parliament.

The attempt to oust Mr Dini, led by the former prime minister, Silvio Berlusconi, was given further impetus when the Communist Refoundation party, which has 24 deputies, said it would vote against him.

Shares were marked down sharply, with the Mibtel index falling 165 points to 8,912, a drop of almost 2 per cent. Few escaped. Fiat fell L124 to 4,965, Gemina L30 to L601 and Pirelli L66 to L1,970.

But the fall in Italian equities was outstripped by the decline in the German stock market. The Dax index of 30 stocks fell almost 3 per cent, with Volkswagen tumbling 3.5 per cent and BMW by 3.4 per cent.

Stock markets also fell sharply in France, the Netherlands and Sweden. The FT-SE 100-share index escaped relatively lightly, falling 19.9 points to 3,531.5. Gilts were down half a point, with the shorter end worst-affected.