Sterling's continued strength could cause problems

THE pound has again fallen to 90p sterling with the continued strength of the British currency threatening to cause problems for the Government and the Central Bank in the weeks ahead. Sterling fell back initially yesterday, after figures showing a surprise drop in British manufacturing output.

But the British currency soon recovered and having gained to around 90.5p sterling, the pound was again stuck just above 90p sterling in late trading.

The Irish currency climbed back to just above DM2.66 in late dealing - not far below Friday's close - and the pound still remains by far the strongest currency in the ERM band and is trading some 25 pfennigs above its central rate of DM2.41. Speculation that this will force the Government to revalue the currency in the months ahead continues to circulate.

The pound remained 10.7 per cent above the weakest currency in the ERM band yesterday; the top limit in the band is 15 per cent. There has been recurring speculation that the strength of the currency in the band will eventually force the Government to revalue the pound's central rate.

Otherwise analysts believe that the pound could be exposed to a bout of selling pressure, which could drive it lower against sterling and create inflationary dangers. They also point out that it would not be appropriate for the pound to join the single currency at an exchange rate against the deutschmark way below its existing rate as this would also pose an inflationary danger.

However, with exporters and farmers strongly opposing the idea of a revaluation, the Government is unlikely to take the initiative on the issue, unless it is forced into a corner by events on the foreign exchange markets. It is thought that the issue of a revaluation has been discussed in the Department of Finance, but not considered as a serious policy option at any stage.

The Central Bank is likely to oppose the pound entering monetary union at a rate way below its existing rate on the markets but with the mechanism for setting the rates at which currencies will enter monetary union still to be decided, it is not yet evident that the Bank is supporting an early revaluation move.

It seemed early yesterday that weak British manufacturing figures might offer some relief for the Irish authorities by leading to an easing in the value of sterling. However, the British currency soon recovered, buoyed by continued speculation about an early increase in interest rates.

Output in the British manufacturing industry slumped in May, hit badly by the strength of sterling, but analysts in London said that the independent Bank of England was still likely to raise interest rates this week.

Figures on Monday registered the biggest monthly fall in manufacturing output for nearly four years as sterling, which has leapt 21 per cent on a trade-weighted basis since August last year, punished exporters.

The Office for National Statistics said manufacturing output fell 1.1 per cent in May compared with April, pushing the year-on-year growth rate down to 1.0 per cent from 2.7 per cent in the year to April. Economists, who had expected a small rise in manufacturing output, said the fall was a worry for the Bank of England.