The euro has hit yet another new low against sterling as the UK currency surged to 14-year highs.

It closed at 60.08p against sterling, from 61.17p a day earlier. As a result, the pound closed at 77.54p from 77.66p.

According to Bank of Ireland and Ulster Bank economists, the pound will drop as low as 75p, its lowest-ever level, within months.

Mr Aziz MacMahon, economist at Ulster Bank, said the old view that the UK simply could not live with a stronger pound no longer held water, as the good performance of UK exports demonstrated.

And, according to Mr Jim Power, chief economist at Bank of Ireland, there is no reason to sell sterling at the moment, while the euro still looks to be on technically more precarious ground.

Sterling's trade-weighted index, which is closely watched by the Bank of England when assessing sterling's strength, firmed to a high of 109.5, a level not seen since January 14th, 1986.

Analysts said last week's interest rate rise and a string of buoyant economic releases - even in the sectors most affected by sterling's strength, such as manufacturing - were behind sterling's advance to its new peaks.

According to Mr MacMahon, manufacturing and industrial output are traditionally hurt by rises in an exchange rate. Recent UK data, however, have questioned this theory.

With interest rates set to rise to as high as 7 per cent or more at the end of the year, demand for the currency was picking up, he added.

He said the euro would drop to 59p against sterling, putting the pound at around 75p against sterling.

Mr Power said the euro would now consolidate at around 61p, but given that there is no reason to sell at the moment (interest rates are moving higher), the growth environment is positive and sterling still has a strong safe-haven status, the pound would drop to 75p within months.

He said the fact that a reasonably positive German business confidence survey did not boost the euro this week meant it was still looking shaky on technical grounds.

There are interest rate moves also expected in the euro zone, however.

The European Central Bank's chief economist, Mr Otmar Issing, stepped up recent warnings about rising inflation by calling the current wage claim negotiations a "dangerous, fragile situation".

According to Mr MacMahon, that may put the next interest rate rise here as early as February rather than April as widely expected.

Mr Issing said there was a danger that the temporary rise in inflation due to surging oil prices would become more permanent if it led to higher wage settlements.

He added that the weak euro was also very negative for Irish inflation, already running at above 3 per cent. A falling exchange rate, declining unemployment and still-to-be-implemented Budget tax cuts and monies under the National Development Plan meant there was no reason prices would not rise further this year, he added.