THE pound fell to its lowest level against sterling in over six years yesterday, trading below 90p for the first time since April 1991, before recovering later to close just above the 90p level.
Continuing sterling strength has been putting pressure on the pound, although it is hanging on to sterling and rising against the deutschmark.
Higher than expected British inflation data raised interest rate expectations and sent sterling heading again into record territory.
Analysts said it is now heading towards three deutschmarks, with today's Bank of England monetary policy committee meeting being closely watched for any sign of a rate increase.
The fall in the currency has increased nervousness in the Irish interest rate markets, although dealers say the Central Bank does not appear to be pushing for higher rates yet.
The pound closed at 90.05p against sterling, down from 90.33p a day earlier, and at DM2.6744 from DM2.6548.
However, it had traded as low as 89.7p during the day.
Despite the high level of the pound against the deutschmark and other European currencies the trade-weighted index closed at 66.81 yesterday, only marginally above the low of 66.5 just before the last interest rate increase.
Mr Jim Power, chief economist at Bank of Ireland, pointed out that the Central Bank was unlikely to be keen to raise interest rates when the currency is strong against the deutschmark. Such a move could push the pound even higher in the ERM band, where it was already the strongest currency, Mr Power said.
Traders said the pound was likely to remain strong against the deutschmark as long as talk about revaluation is in the air.
A revaluation would narrow the gap between the pound's current rate and its central rate in the ERM band.
However, most analysts believe a revaluation is unlikely to be on the cards in the near future.
Mr Power said the authorities should sit on the fence and watch how the market develops.
He pointed out that before sterling dropped out of the ERM, its central rate was set at DM2.95, which was generally regarded as being over valued.
Since then, he noted, Germany had outperformed in terms of unit costs movements, as costs there had been falling.
Based on that, he added, sterling was likely to fall back significantly against the deutschmark as fundamentals reasserted themselves.
"As a result, a revaluation would be seriously exposing ourselves to a depreciating sterling. At the end of the day, if it ain't broke, don't fix it."
Nevertheless, the mere talk of a revaluation suits the authorities here very well as it keeps the pound well supported against other European currencies, without the need for intervention.
