THE US dollar has gained ground as speculation increased that American interest rates would not fall again.

However, fears of a sharp fall in European markets yesterday proved unfounded as Wall Street opened firmly after Monday's sharp. But the US market was on the decline again in late trading after European markets closed and the Dow Jones Index was down 33.96 points to close at 5,560.41. The widely watched barometer of big companies had lost about 88 points on Monday.

The dollar rose to its highest levels in months against the yen and the deutschmark on the London forex market yesterday, benefiting from differentials between US interest rates on one hand and Japanese and German rates on the other. Comments from Bundesbank president, Dr Hans Tietmeyer, hinting at lower German rates, helped the US currency.

The dollar's rise pulled up sterling, due to the traditional relationship between the two currencies and the Irish pound rose in its wake against the other ERM currencies.

The pound rose by 1.5 pfennings to DM2.3494 and is now almost back inside the now abandoned 2.25 per cent ERM band for the first time in months, standing 2.26 per cent below the mid point of the band.

The US dollar was trading at 108.16 yen against 106.96 last Thursday evening, its highest level for 25 months. The pound fell by 0.3 cents from its pre-Easter level to 1.5735.

The US currency was also trading at DM1.4918 against DM1.4793 on Thursday the new reading being the high point since February 1st.

A firm opening, on Wall Street yesterday put paid for the moment to worries about a collapse in international markets.

The US market had fallen sharply on Monday on fears of a rise in US interest rates after a 140,000 jump in US employment in March suggested the economy was stronger than economists had anticipated. As a result, Wall Street fell by 88.5 points on Monday.

European bourses opened moderately lower yesterday quickly steadied. Analysts argue that clear signs of economic weakness in Europe meant interest rates could still fall on this side of the Atlantic. Dublin and London share markets ended just slightly lower, while the comments from Dr Tietmeyer helped the Frankfurt bourse's DAX index to gain slightly.

Dr Tietmeyer said in a newspaper interview that the Bundesbank was examining the scope for another small easing in rates.

In a surprise move, Irish bond markets had a muted response to the heavy falls in the US over the Easter break. Analysts had expected European markets to fall after the sell off in Treasury bonds on Friday and Monday.

The stronger dollar and the widening interest rate differential between European and US markets underpinned the bonds, analysts said.

Despite a serious fall at the opening, by the close the benchmark five year bond was only down to 103.24 to yield 7 per cent from 6.98 per cent on Thursday. The 10 year fell to 100.10 to yield 7.82 per cent from 7.76 per cent at the previous close.

Traders said the market now recognised that Germany and the US are at very different stages of the economic cycle.

"Europe is decoupling more than expected," said Mr Dermot O'Brien, economist at NCB Stockbrokers. There is an increasing contrast between weak European markets and a stronger US, economy.