Financier Soros Adds to Pressure on European Exchange Rate System
Financier George Soros’ declaration Friday that he’s abandoned his pledge not to trade the beleaguered French franc doesn’t seal the European Monetary System’s fate. It was already in critical, perhaps terminal condition, traders and analysts said.
The European Community’s exchange rate mechanism came under pressure Thursday after Germany’s central bank stunned traders and investors by leaving its key discount rate unchanged. A rate cut would have eased tensions in the system by taking pressure off weaker EC currencies, whose governments have kept their own interest rates high to stay within the ERM.
Soros jumped into the fray Friday, renouncing an earlier pledge not to speculate against the franc for fear of ruining European unity. If the Bundesbank isn’t willing to go to bat for the ERM, neither is he, Soros said.
“It is futile to attempt to protect the European rate mechanism by abstaining from trading in currencies when the anchor of the system, the Bundesbank, acts without regard to the interests of the other members,” Soros said Friday.
His statement stirred speculation that Soros’ joining the fray would doom the ERM. In truth, any damage Soros inflicts on the franc will pale in comparison to the damage done by the flood of speculation that followed the Bundesbank’s decision, traders and analysts said.
“It’s like going to a New Year’s party after midnight,” said Marc Chandler, senior market strategist at IDEA, a financial consulting firm. Soros “decided to short the French franc now that it’s at its floor in the ERM.”
The franc was trading near the bottom of its prescribed range against the mark when Soros said his mammoth funds had been unleashed to trade the franc. And there it stayed.
Soros’ comments often roil financial markets because his investment funds, which have $9 billion in assets, made a reputed $1 billion betting correctly that the British pound would fall out of the ERM last September.