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Last Updated: Monday, 9 June, 2003, 17:11 GMT 18:11 UK
Euro studies send pound lower
pound's slide vs euro graph

The UK pound has fallen sharply against the euro and the US dollar on the day Chancellor Gordon Brown presented his verdict on UK adoption of the euro.

Economists attributed the movement to a faulty interpretation of a UK Treasury report on the appropriate level for the UK to join the European single currency.

The report was part of the Treasury's 18 studies on the UK and economic monetary union.

The studies were conducted by the Treasury and outside experts to support the five tests for euro entry.

One paragraph in the executive summary of one key study mentioned an ideal rate for the pound of 1.175-1.33 euros, the equivalent of 75-85p per euro - much weaker than analysts had expected.

"This is a long way from where it is now and sterling is being whacked by this," said Ray Attrill, head of research at 4cast.

However, Treasury officials hastened to correct this impression, pointing out that in following paragraphs the study rejects this range and finds that a rate of 1.37 euros - or 73p - would be the best "equilibrium" rate. One euro currently buys 71p.

Greater trade

Sterling fell by more than a penny against the euro and by two cents against the dollar on Monday morning, minutes after the studies were released.

As analysts ploughed through the 1,800 pages of documentation, some thought the Treasury believed the pound had to fall further against the euro to ease a currency switch, although the studies added that there were clear benefits from joining the single currency, including greater trade with the EU.

Analysts had thought the pound was already trading at levels that were acceptable for a switch to EMU.

By 1700 GMT, one euro cost 71.3p while sterling stood at $1.65.

US ties

The Chancellor, Gordon Brown, gave a full assessment on euro entry on Monday afternoon.

He confirmed economists' expectations by giving a "no, not yet" verdict, saying four out of the five euro tests had not been met.

But Mr Brown said there were benefits for joining the single currency in good time.

"We have set out the real benefits to Britain of membership of the single currency; shown that with the achievement of sustainable convergence and flexibility all five tests could and can be met; and laid down the concrete and practical steps which we will follow," he told the House of Commons.

"And with a programme of European economic reform benefiting Britain, I believe a modern long term and deep seated pro-European consensus in Britain about Britain's role in Europe and Europe's role in the world can and will be built."


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