THE pound has gained ground against sterling, as investors sell the British currency due to the BSE scare. However, an announcement from the British health minister towards the end of the day resulted in a minor rally in British gilts and sterling.
The British Health Secretary, Mr Stephen Dorrell's announcement, which aimed to reassure consumers, caused a quarter point rally in the long gilt and a small rally in sterling against the deutschmark. However, some traders questioned whether this would be sustainable, given that Germany and France are likely to strongly contest the announcement.
At the close yesterday, the pound was trading at 103.15p from 103.00p on Friday. Dealers said this could rise as far as 103.70p if sterling continued to suffer.
"We're telling customers it's all one way now, one analyst said. "Nobody knows for sure what will happen but 103.70p is certainly a lot more likely than a return to 102.80p.
Sterling has lost over 2.5 pfennings against the deutschmark since Friday morning when it was trading around DM2.2760. It closed yesterday at DM2.2504. Traders said they expect the pound to move above 103.30p if sterling falls below the "critical" level of DM2.2400.
The pound did not see the same gains as other European currencies against sterling. "We tend to trade in line with sterling and there are also potential BSE worries here," one trader said.
Early trading was quiet as dealers sat on the sidelines waiting for the announcement on whether up to 4.5 million cattle would have to be slaughtered to prevent bovine spongiform encephalopathy (BSE), or mad cow disease, infecting humans.
Dealers say the British government will find it hard to sell extra gilts to fund any expansion in the budget deficit because of the dangers to inflation from BSE.
Some of the dairy herd is also infected with the disease and if milk cattle are slaughtered, this will mean Britain will have to rely on more expensive, imported dairy products.
Investors' demands for a risk premium for holding British rather than German government bonds have risen sharply since the BSE scare took off on Friday.
The yield differential for 10 year bonds has risen to 1.83 percentage points from 1.78 points on Friday morning.
Dealers see no respite in the short term although they argue gilts have discounted much of the bad news. The pound, too, is likely to stay jittery.
There is also concern over the possible impact on Britain's trade deficit, with the danger that the £3.5 billion home beef market and the £6.0 billion milk market will have to be satisfied with imports.
