The British pound plunged to an all-time low of $1.10 yesterday. The Thatcher government, alarmed by the long slide of the British currency toward parity with the dollar, attempted a rescue by pushing British interest rates sharply higher.
But after a quick initial response to higher base lending rates posted by the Bank of England, the pound weakened again as Norway announced it would abandon official crude oil prices. The move by Norway increased pressure on Great Britain once again to lower North Sea oil prices, a critical source of government revenue.
In London, the pound closed at $1.1105, down from Friday's $1.1297. In New York, it finished at $1.1121, compared with $1.1176 last week.
Meanwhile, throughout the day, the U.S. dollar continued its unprecedented show of strength almost everywhere in the world, rising to its highest point against the Japanese yen since November 1982, trading briefly at the psychologically significant level of 3.20 West German marks to the dollar, and pushing the French franc to a record low.
But the eyes of the financial world were on London, where the pound in the last four months had lost 15 percent of its value against the skyrocketing dollar. Speculators and investors alike were wondering whether the pound -- in pre-World War II times worth $4 -- actually would become a penny-for-penny equivalent of the dollar.
Market analysts also said that the British are worried about the weakness of the pound against the currencies of their European trading partners.
Since November 1980, when the pound traded at $2.45, the decline against the dollar has been 55 percent, paralleling the slide in real oil prices that has been a blow to a sustaining source of income from the British North Sea oil fields.
David Palmer, senior vice president at First American Bank of New York, said: "The most powerful influence on sterling right now is oil prices, and until such time as that question is resolved, the pound will remain under pressure."
Palmer said that "sterling is a petro-currency, no matter how you look at it. As a petro-currency, the pound was worth $2.45 when oil prices were going to the ceiling. We're now seeing the other side of that coin."
When the foreign exchange markets opened in the Far East yesterday, the first clue that the day would be unusual came with a sharp drop for the pound in Hong Kong to $1.1025. That decline was perhaps influenced by published reports that the British government would not step in even if sterling tumbled all the way to exact parity with the dollar.
Over the weekend, Britain's Chancellor of the Exchequer Nigel Lawson denied these reports in a BBC interview, saying that the "plain fact is that this government is concerned about the exchange rate."
At mid-morning, the Bank of England announced that it was re-imposing a minimum lending rate, forcing British banks to raise their base lending rates by 1.5 points to 12 percent. The move was an effort to persuade investors to hold on to their pounds instead of swapping them for dollars.
According to a report by United Press International, the Thatcher government instructed the Bank of England to set higher interest rates in motion after a weekend meeting between central bank managers and Treasury officials.
Since August 1981, there had been no minimum requirement. Instead, the central bank had determined the rate at which it loans money to London's 10 discount houses on a day-to-day basis. On Friday, most banks boosted their lending rates around one full percentage point to 10.5 percent, but this proved to be insufficient to stem the tide. (The discount houses are intermediaries that lend money to other financial institutions.)
Some financial analysts said that the minimum lending rate, which briefly rallied the pound to $1.13, was counterproductive, because it offered the prospect that the central bank might post an even higher rate at any time.
The plunge of the once-mighty pound is producing a political as well as economic crisis for the ruling Conservative Party. The cheaper pound not only wounds national pride, providing a rallying cry for the opposition Labor Party -- it also makes imports more expensive -- and therefore adds to inflationary pressures.
The Conservative Party, faced with one of the weaker economies in Europe, was not anxious to boost interest rates, which threaten to exacerbate the already serious problem of high unemployment.
According to reports by news agencies, Roy Hattersley, fiscal spokesman for the Labor Party, said the pound's drop showed how badly the Conservatives have mismanaged the British economy.
After listening to Lawson on the BBC, Hattersley said: "I fear that the chancellor demonstrated one of the problems, which is the foreign exchange market listening to him today and over the last few weeks and realizing that the government has absolutely no policy for the exchange rate. . . .
"While there is that sort of muddle, vacillation and, frankly, incompetence, it's not surprising that people are worried about the pound's value and therefore take their money out of sterling and put it into other currencies."
In Tokyo overnight, the dollar rose to 254.55 from 253.60; in New York, it soared to 255.63 yen from Friday's 254.52.