THE pound has gained further to trade at almost 104p sterling with the British currency remaining weak on the international markets. But the Irish currency failed to make headway against the deutschmark, despite increasing speculation of a German interest rate cut later in the week.
At the same time all the Irish markets remained very nervous, with little liquidity as traders in equities and bonds waited for a signal from the US or Germany for the next large movement in the markets.
The ISEQ closed down 11 points yesterday as the US continued to send mixed signals and had another extremely volatile day. The FTSE fell by 29.2 points after the Dow plunged over 50 points on opening. It then staged a recovery by the end of European trading and was just 8 points off. Within an hour it was once again over 50 points off. The Dow finally closed 35.88 points down at 5390.94.
The nervousness on Wall Street led to a decline in the dollar and, despite widespread expectations of a German interest rate cut later this week, the US currency fell against the deutschmark in afternoon trading.
Sterling and the pound followed the dollar lower in the afternoon. The pound eventually closed at 103.90p against sterling from 103.84p on Friday.
It managed a small rally to third from the bottom in the EMS grid to 2.3914 deutschmarks. The Danish krone and French franc are now both below the pound in the grid and we are back in our notional 1 per cent band, Dr Dan McLaughlin, chief economist at Riada Stockbrokers said.
A German rate cut would boost the pound against the deutschmark. The prospects for a cut in the key German money market interest rate the repo rate were helped by comments from Bundesbank President Mr Hans Tietmeyer that the German central bank would keep checking to see when conditions would allow for a rate cut.
In addition money supply growth below 10 per cent fuelled expectations of easier German credit after the Bundesbank council meeting on Thursday, the last before the central bank's month long summer recess.
In the US, dealers have their eyes on the Federal Open Market Committee meeting on August 20th for a possible rate hike and Japanese officials have been up able to dispel worries of a rise in their discount rates.
Britain on the other hand is moving in the other direction. Dr McLaughlin said the last few months retail sales figures had disappointed analysts "Another number below expectations could allow the Chancellor of the Exchequer, Mr Kenneth Clarke, to cut again," he said.
He added that a British rate cut was expected by the market and should not feed through to an even higher pound against sterling.
Conditions in the Irish interest rate market remained tight. The key one month was trading at 5.44 per cent, around the levels of last week. A move above 5.5 per cent could trigger a general round of retail rate rises but analysts said the Central Bank seemed happy enough to sit back and not push the rate up.
"They will at least wait for the mortgage figures out next week" said one trader.
Other analysts noted that a German rate cut would make it extremely difficult for the Irish central bank to move in completely the opposite direction. After all, interest rate differentials are part of Maastricht," one analyst said. "They can't afford for the differential to become too wide."
