Overseas buying and strong sterling lift pound

THE pound has risen strongly on the international markets, benefiting from the strength of sterling and demand from international investors. By late yesterday the Irish currency had breached the 2.60 deutschmarks barrier and was close to 92.5p sterling.

Strong demand for the pound meant it gained more than two pfennigs against the deutschmark, to close yesterday at DM2.6031. While the pound has recently run into selling pressure when it approached DM2.60, there were no signs of sellers in the market as it rose late yesterday.

In recent weeks the pound has periodically faced selling pressure on the markets, as investors have speculated that the outgoing Government wanted to see it trade lower in preparation for the move to monetary union. The pound remains well above its central ERM rate of DM2.41.

However with sterling on the rise again, demand for the pound has again increased. Buying has also been fuelled by some speculation that the new Government might choose in the months ahead to revalue the currency's central rate in the ERM band. This would be a way of heading off selling pressure and might also allow interest rates to decline.

One of the reasons why the pound has faced periodic bouts of selling is that it is one of the few currencies trading well above its ERM central rate and investors believe that these rates may be used to set entry levels for monetary union. Revaluing its central rate would remove this reason for selling the currency and the resulting pressure on interest rates.

However some analysts remains sceptical that the new Government will go down this road.

A buy recommendation on the pound from an international investment bank added to demand for the currency yesterday, according to market sources in Dublin. As well as rising against the deutschmark and the other ERM currencies, it also held its own against the rising sterling, gaining slightly to close at 92.48p sterling.

Overall, sterling has gained from the latest uncertainty over monetary union. However by late yesterday investors across Europe were trying to assess a whole range of comments from EU leaders, most of whom continue to insist that the single currency would be launched on schedule on January 1st, 1999.

The markets are uncertain how to respond to the latest events, according to Mr Kevin Daly, treasury economist at Ulster Bank. He pointed out that the latest uncertainties had some to believe that monetary union might be postponed - which would tend to push up the deutschmark in the short term - and other to speculate that it might be launched with a large group of currencies - which would be an argument to sell the German currency.

The strength of the pound on the markets has removed some of the nervousness about a further increase in interest rates. There had been concerns that the fall in the pound to around 90p sterling might prompt the Central Bank to announce another increase in rates to try to head off the danger of inflation.

Market sources in Dublin said yesterday that much would now demand on the May inflation figures, which would be published tomorrow and on the trends in borrowing from banks and building societies.

Internationally, investors are waiting to see the outcome of a range of meetings over coming days to try to overcome French concerns about the stability pact - the rules of financial discipline which will govern states inside monetary union.