THE French franc and the D Mark tumbled on foreign exchange markets yesterday as investors bet that the French election result and the German row over revaluation of gold reserves would lead to a broad based and weak European monetary union.
The French franc fell heavily before making a recovery in afternoon trading in Europe. Despite repeated intervention by the French central bank, a dollar that could buy FFr5.76 yesterday morning ended the day worth FFr5.82.
Meanwhile, cracks emerged yesterday in the determination of Bonn government leaders to press ahead with revaluing Germany's gold reserves in the teeth of fierce Bundesbank opposition.
On the markets, the deutschmark was also bloodied, as traders worried about it being converted into a weak euro. The German currency shed nearly three pfennigs against sterling to end at DM2.81, and lost two pfennigs against the dollar to DM1.72.
There was no trading in the pound because of the bank holiday, however it may open stronger today against the deutschmark.
The left's victory in the French elections significantly increased anxiety in Bonn about the future of EMU, particularly as it came on the heels of the dispute between the German government and the Bundesbank over the revaluation of the country's gold reserves - a government plan aimed at helping to meet the criteria for joining a single currency.
Mr Karl Lamers, parliamentary foreign spokesman for the Christian Democratic Union and Christian Social Union alliance, said France and Germany held a crucial role in the introduction of the euro. The markets must not be given the impression that the criteria will not be taken so seriously," he said.
For the opposition Social Democratic Party, Ms Heidemarie Wieczorek Zeul, European spokesman, predicted that Bonn might attempt to use the French elections as an excuse for a postponement of the euro project.
But Mr Klaus Kinkel, German foreign minister, played down the French Socialists' suggestions that they favour a broad monetary union including Italy and Spain and a more flexible reading of the Maastricht treaty.
Mr Jacques Santer, president of the European Commission, said there was no possibility of a delay in the launch of EMU beyond the planned starting date on January 1st, 1999.
"The timetable is in the treaty," he added. "That is an agreement which is in Maastricht and we have to stick to treaty commitments."
Bond analysts were surprised that bond markets had held their ground after the French elections, but warned that conditions were likely to become volatile.
European equity markets were generally higher, apparently on expectations of a rebound in economic growth with anticipated currency weaknesses. The Paris CAC-40 ended 17.5 higher at 2601.45 after being indicated at a 4 per cent loss in premarket trading. Frankfurt was nearly 1 per cent higher in after hours trading.
Meanwhile, the Free Democratic party, junior members of Chancellor Helmut Kohl's coalition, was seeking urgent talks to reach an "amicable" agreement with the central bank. The call by Mr Guido Westerwelle, FDP general secretary, was the first hint of a breach in the coalition's united front.
Last week, the Bundesbank condemned the government's plans to revalue the country's gold reserves to help meet the Maastricht criteria for European monetary union.
In calling for talks, the FDP said it stood firm behind the principle of revaluing gold and other reserves, adding that the dispute with the Bundesbank was only over timing. Mr Waigel said he was prepared for talks, although finance ministry officials in Bonn indicated he was in no mood to climb down.
