THE pound has reached new highs against the deutschmark trading as high as DM2.53 for the first time since the January 1993 devaluation. It is now running away at the top of the ERM grid and is more than 6 per cent higher than the lowest currency in the band.

Continued sterling strength has dragged the pound higher against most European currencies but it fell slightly against sterling yesterday - almost reaching parity.

Sterling continued to gain on expectations of another interest rate rise.

"The Chancellor of the Exchequer [Mr Kenneth Clarke] can't present an austere budget on November 26th for political reasons, so tighter monetary policy is inevitable to counter inflationary pressures," said Mr Jeremy Hawkins at Bank of America.

The pound closed at DM2.5290 from DM2.5191 a day earlier and at 100.08p against sterling from 100.31p. Talk of further Central Bank intervention served to hold a floor under the pound at just above parity, traders said.

Mr John Beggs, chief economist at AIB, said he expected sterling to remain strong ahead of the British budget next Tuesday. "If the Chancellor then cuts taxes and makes modest spending cuts, it could go higher again."

Even without much in the way of spending cuts, the market would look to tighter monetary policy to keep it going, Mr Beggs added. According to Mr Beggs, the pound is likely to follow sterling up to around DM2.55 but after that it could fall back below parity.

"Over the next four weeks, the pound will trade between 99.5p and 100.5p," Mr Beggs predicted.

However, sterling could be hit if Mr Clarke and Bank of England governor Mr Eddie George fail to raise rates on December 11th.