The pound has continued to gain ground against sterling and the deutschmark, as speculation on a possible revaluation of the Irish currency in the ERM gathers pace. The pound closed at 94.02p against sterling from 93.56p on Friday and at 2.6928 marks from DM2.6816. At one stage early in the day the currency was as high as 94.8p sterling.
Mr Oliver Mangan, chief economist at AIB Capital Markets, said there is a growing view among international currency players that a significant revaluation of the currency is becoming more likely.
The pound also benefitted from a sterling fall against the Germany currency, after dealers took the view that the German economy is staging a recovery and is a better home for speculative cash.
London dealers now believe UK interest rates will not rise after four recent increases despite figures showing industrial production grew much faster in July than had been expected.
The revaluation speculation was triggered by recent comments from Bundesbank President Dr Hans Tietmeyer, when he implied he would not stand in the way of the Irish currency in the ERM. At the end of July, before Dr Tietmeyer's remarks, the currency was trading as low as 87.3p. Mr Mangan warned that a significant sell-off could be triggered if a revaluation fails to materialise, or the speculation wanes.
The focus is now on the informal meeting of finance ministers this weekend in Luxembourg. The international houses believe that a decision on the method of fixing currencies entering the euro will be decided on. That would mean the pound would have to revalue or risk being forced rapidly down its central rate of DM2.41 marks.
The speculators also believe that with the economy growing so strongly, the authorities would have no problem with unwinding the 1993 devaluation of the pound's central rate in the ERM. Before the devaluation the central rate was DM2.68. A 10 per cent revaluation from the existing central rate would bring the central rate to DM2.65 .
Most domestic houses do not believe that there will be an immediate revaluation, although brokers NCB are still expecting that a smaller revaluation could come as early as this weekend's ECOFIN meeting.
Mr Mangan of AIB pointed out that the Irish authorities could find themselves in a corner. But he added that if they are forced into a corner by the EU states, they are more likely to go for a smaller revaluation of 4 or 5 per cent. That would trigger a fall in the pound's exchange rate to about DM2.60 marks, he said, as it is currently trading well above its existing central rate.
However Mr Mangan warned that an early move to revalue the pound could be risky. "Even a small revaluation could provide a hostage to fortune. Sterling is in decline and has fallen by 20 pfennigs over the last month. Many of the London houses do not realise the extent that we are tied to sterling. After a revaluation we would have no scope to fall, if sterling fell back."
Mr Colin Hunt, economist at Bank of Ireland, added that the idea there could be a revaluation this weekend is "laughable". The currency is moving in the policymakers' direction, he noted, and if this is sustained over the coming months we could enter monetary union at our existing central parity and without any inflationary impulses from a strong sterling.
However, Mr Mangan added that it is unlikely that any formal decision will be taken in Luxembourg. It appears that the main people forcing the pace are Luxembourg because they want a definite achievement to point to during their Presidency. But he added that Germany is unlikely to want to go down this route as it could mean defending the lira before a decision was even made to allow Italy to join.
