THE pound fell half a penny yesterday to its lowest level against sterling in almost 18 months while reaching a post-currency crisis high against the deutschmark.
At the close of business yesterday the pound had fallen almost half a penny and was trading at 101.4p from 101.9p a day earlier. It is only five weeks since the pound was trading over 104p and it has not traded as low against sterling since May 1995.
In addition, the pound is now through the notional 2.25 per cent band within the European Monetary System which many commentators believe the Central Bank is keen to keep within. It closed yesterday at 2.4711 deutschmarks from DM2.4620 a day earlier, its highest level since the currency crisis.
The falls against sterling are good news for exporters but could spell trouble for the authorities' inflation target if sustained over the medium term.
Recent reports from the ESRI and other commentators have pointed to the high exchange rate against sterling being one of the main factors holding back Irish inflation while the economy has been growing strongly.
Sterling has been surging ahead after it became the dealers favourite over the past few weeks. So far it looks as if little is preventing sterling moving higher.
It is being bought by a broad range of investors, from UK fund managers liquidating their holdings in the Far East to US funds worried about the confusion surrounding the EMS currencies in the run-up to monetary union.
Many investors are also convinced that the British economy is now growing at a more rapid rate and that is feeding through to demand for British gilts and equities as well as the currency. The London stock market closed at yet another record high yesterday.
The pound is riding on sterling's coat tails to push higher against the deutschmark but is not quite keeping up the pace and so is falling back against the British currency.
Recent interventions by the Central Bank have been partly inspired by a desire to keep the pound within the old ERM bands against the deutschmark. Part of the Maastricht criteria for entry to the single currency states that currencies must nave traded broadly in line with one another.
Mr Jim O'Leary, chief economist at Davy Stockbrokers, said he would expect the pound to be trading around 102.5p given the strength of sterling against the deutschmark. However, recent interventions by the Central Bank mean it is at a lower level than it would otherwise be.
Further gains by sterling could push the pound even lower. Mr Jim Power believes that if sterling reached DM2.45 it could mean the pound falling below 101p against sterling. It traded yesterday at DM2.4370 from DM2.4155 a day earlier. These are new highs for the year and today it is expected to head towards DM2.4430, which it has not been close to since January 1995.
According to dealers in London, sterling will then be pushed up to DM2.4710 which would be an almost two-year high.
Mr O'Leary added that if the pound were to fall further against the deutschmark and that was sustained, the Central Bank would have to consider intervening to push it back up, the reverse of its policy in recent weeks.
The problem is that would mean the pound being pushed even higher against the deutschmark, something the Bank will be reluctant to do.
