Dow fall to put markets on edge

A sharp fall on Wall Street ended a day of turbulence on the international financial markets yesterday. Earlier much of the focus had been on the foreign exchange markets, where sterling fell sharply, allowing the pound to climb back above 91p.

Late yesterday, the recent sharp volatility of the New York market continued. The Dow Jones index of US shares ended down 127.98 points at 7893.25, a drop of almost 1.6 per cent.

The fall followed three successive daily rises of more than 100 points each. European markets are likely to react this morning to the latest decline and will again be nervously awaiting Wall Street's opening direction.

Part of the reason for nervousness in New York late yesterday was that Friday has often been a day which has seen sharp losses in recent months, culminating in a 247-point tumble last Friday.

In another highly volatile day, yesterday, the Dow was down by over 2 per cent at one stage, before clawing back some of its losses in the minutes before the markets closed.

Earlier many European stock markets, including Dublin, had fallen back, although the London market did hold on to some early gains to close higher. European markets took little encouragement from the decision by the Bundesbank to leave its key interest rates unchanged, at its first fortnightly meeting. Market commentators expect that the Bundesbank will start to edge money market interest rates upwards in the weeks ahead by adjusting its money market rate. The first indication of any change could come as early as next week. Yesterday, Mr John Beggs, chief economist at AIB Group Treasury, said he expected the German central bank to start a very gradual process of nudging up its money market interest rates in the near future.

One of the key factors which may encourage the Bundesbank to push interest rates higher is the weakness of the deutschmark. However, the German currency did gain some ground against an ailing sterling yesterday, with the British currency suffering heavily after a report from the Confederation of British Industry pointed to the impact the currency's strength was having on exports. Half the exporters in the latest monthly survey said export order books were below normal, although strong domestic demand in Britain was taking up some of the slack.

The fall in sterling allowed the pound to rise strongly and, in a move which will please the Central Bank, the Irish currency closed over 0.8p stronger at 91.34p sterling.

A sustained rise in the pound against sterling would help to allay concerns about a rise in inflationary pressures resulting from higher import prices from the sterling area.