10 October 2001, 16:35  POLL-Pound overvalued, needs to lose 10 pct vs euro

By Pratima Desai
LONDON, Oct 10 - Sterling is overvalued and would have to fall about 10 percent against the euro if Britain decided to join Europe's monetary union, according to economists polled by .
In a survey carried out a week after British Prime Minister Tony Blair revived the idea of entering the euro zone, 23 out of 28 respondents said sterling was overvalued against the euro.
Of the 27 who suggested a rate for sterling entry, the median forecast was 68 pence per euro, equivalent to about 2.88 German marks. On Wednesday the euro was trading at around 62.80 pence -- about 3.11 German marks.
"Between 2.80 and 3.00 (marks) is the sort of range we would be looking at. On fundamental measures most people would be content with that," said Ross Walker at RBS Financial Markets.
"Anything above three marks would probably be a hard political sell...that's where it starts to bite manufacturing. But the longer it stays up here, the harder it will be to argue for a lower rate."
Last week the pound fell briefly against the euro after Blair renewed a pledge to call a referendum during his current five-year term if his government is satisfied that Britain's economy is sufficiently compatible with the euro zone's.
Twenty of the 28 economists polled put the chances of Britain joining the euro zone within the next five years at less than 50 percent.
But debate continues over whether the market currently values sterling fairly against the euro.
Five contributors said it did, some dismissing complaints from British manufacturers that the strength of the pound was undermining their business. None said it was undervalued.
Kirit Shah at Sanwa International said from the political perspective sterling was overvalued against the euro.
"But from the market point of view it's fair value, given the high interest rate environment in the UK and potential problems for Euroland when they introduce the euro (notes and coins in January)."
Six quarter point cuts since February to 4.50 percent, the lowest in 37 years, still leaves benchmark rates in Britain the highest among the Group of Seven industrialised countries.
Benchmark rates in the euro zone are at 3.75 percent and in the United States they stand at 2.50 percent.
Forecasts for the level at which sterling should join the euro ranged between 62.58 and 75 pence.
"If it (sterling) wasn't so strong we wouldn't have such an acute recession in the manufacturing sector," said Marc Ostwald at Monument Derivatives. "Something closer to the old three mark level would be appropriate. Anything higher is not tenable."
At the top of the range was Nick Kounis at Fortis Bank in Amsterdam, who said productivity differences and cumulative current account differences favour a much higher euro/sterling exchange rate.
"The UK has a high cumulative current account deficit while the euro zone has a small surplus," he said.

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