ANOTHER rise in the value of sterling, ahead of next week's British budget, has pulled the pound to a new three-year high against the deutschmark.
However, while the Irish currency continues to trade just over parity with sterling, some dealers in Dublin believe it could drop below loop sterling if the British currency continues to gain ground.
The pound rose again against the ERM currencies yesterday, moving higher along with sterling. It closed almost one pfennig higher against the deutschmark at DM2.5220, its highest level since the devaluation on January 1993. The Irish currency remains by far the strongest in the ERM and is now 5.5 per cent above the French franc in the ERM band and 4.64 per cent above the deutschmark.
Against sterling, the pound closed largely unchanged at 100.19p, continuing to trade in a narrow band between 100.10p and 100.20p. However, some dealers in Dublin believe that if sterling rises much further in value, then the pound is likely to slip below parity.
Over the past couple of weeks the Central Bank has intervened in the market on a number of occasions, buying pounds and selling sterling in order to keep the Irish currency from falling below loop sterling.
This has put a floor of parity under the pound/sterling rate for the moment. However, home dealers believe that if sterling rises much further, the pound will drift down below parity rather than rising further against the ERM currencies.
The Central Bank is believed to have intervened to keep the pound above sterling in order to guard against inflation due to higher sterling import prices. However, market analysts are divided on the extent of the threat.
Some argue that a falling pound against sterling could fuel inflation, while others believe that the strength of the pound against currencies like the deutschmark and the US dollar will offset the inflationary implications of the fall against sterling.
The other problem for the Central Bank is that a condition set down for joining monetary union is that the currency must trade in a stable fashion within the ERM for the previous two years. While the pound is still comfortably within the 15 per cent bands of the ERM band, the EU central banks have been generally trying to keep their currencies within much tighter margins.
Sterling hit the new highs again, in Europe yesterday, fuelled by optimism about the British economy and confidence that the government can actually afford the tax cuts it is so keen to make in next week's budget.
The latest boost came from data showing the British government repaid a hefty £4.4 billion sterling of public debt in October, helped by a flood of corporate tax receipts.
Subsequent talk of interest rate rises helped sterling to four-year peaks against the dollar and near 30-month highs on the mark.
Sterling was powered to a four-year high of 1.6765 against the dollar. It stood at DM2.5220, up strongly from DM2.5082 on Monday evening.
Analysts are confident the Chancellor of the Exchequer, Mr Kenneth Clarke, would use his elbow-room to cut taxes modestly at the November 26th budget, reduce spending and bring down public sector borrowing.
Persistent market fears that the Conservatives could sacrifice economic prudence for votes have been largely soothed by Monday's public sector borrowing requirement (PSBR) data.
Dealers and analysts in Dublin and London remain confident that sterling can rise further, pointing out that any weakness in the currency in recent days has quickly led to renewed demand.
The British currency is very firm", said Mr David Coleman, chief economist at Canadian Imperial Bank of Commerce. "The market thinks British interest rates will be lifted before the end of the year, which supports sterling."
