950828

Dollar slump, mark soar in Europe

LONDON: The dollar dropped more than a pfennig in Europe, to its lowest level since the central banks last intervened on August 15, as the mark rallied following the shock resignation of French finance minister Alain Madelin.

The spectre of a fresh period of political and policy uncertainty in France, alongside renewed murmurs about early elections in Italy, undermined the franc and lira and lifted the mark across the board amid a flight to quality, traders said.

With London markets closed for a bank holiday, however, volumes were drained from the European session and price movements were exaggerated as a result.

At 1355 GMT, the dollar was trading at 1.4606/11, down from 1.4782/92 marks late Friday. Against the yen, it was little changed at 96.55/65, compared with 96.60/69 last week.

Madelin resigned late Friday following disagreements with the French cabinet on social welfare payments. On Thursday, he had raised the ire of French trade unions by urging reforms to tighten public sector pensions and welfare payrments.

"The spillover from Madelin's departure has undermined the franc", said a broker in Rotterdam. Investors will now raise questions about French budgetary policy and other potential splits withing the cabinet, analysts said.

Such concerns could undermine the franc until the 1996 French budget is out of the way on September 20, analysts said.

Yet, French economists said they believe Madelin's resignation would not lead to any great change of policy.

Pro-European Jean Arthuis was sworn in as Madelin's successor today and pledged to stick to the government's budgetary targets. Fiscal rigour, he said, would allow the Bank of France to lower interest rates and thus help create jobs.

The central bank left its intervention rate unchanged at 5.0 percent today, but French analysts said there was still scope for it to lower its five-to-10 day lending rate on Thursday.

The mark surged as high as 3.4590, its highest level since August 1, compared with 3.4367/72 late Friday and the gains extended to the other European cross rates and the dollar.

The mark rallied to as high as 1113.50 lire, meantime, from 1093.05/4.05 Friday despite the fact the Bank of Italy was seen to buy lire for marks about 1108, dealers said.

Leading Forza Italia member Cesare Previti told a newspaper said he saw a possible deal between his party, the right-wing National Alliance and the former-communist PDS to pass a toned-down 1996 budget and call early elections. The 1996 budget must be presented to parliament by the end of September.

Elsewhere, the Portuguese escudo was weaker against the firmer mark, helped by a cut in the Bank of Portugal's key absorbtion rate to 8.0 percent from 8.25 percent.

The dollar, meantime, skid below its May high 1.4625 marks as U.S. trading got underway this afternoon and that caused some jitters among chart analysts.-Reuter