IRELAND'S hard currency EMU aspirations have suffered a setback over the past week and a clear message has been received that our road to EMU may not be quite as smooth as many were beginning to believe.

What started off as a relatively minor, and not overdue, US equity market correction very quickly developed into a mini-crisis for the dollar. It knocked sterling off the lofty perch which it has occupied in recent times and clearly highlighted the problem the Irish authorities would have convincing the financial markets that it can become part of the Single European Currency, with or without sterling.

Within a space of 24 hours, the Irish pound fell from the top to the bottom of the ERM grid in a manner which is reminiscent of what Carlisle FC did in the English League in the 1970s. Not exactly Premiership stuff.

Intense uncertainty about the Us interest rate outlook and nervousness about second quarter company results have contrived to highlight the vulnerable position of the US equity market. This came at a time when the dollar was experiencing considerable difficulties in realising early year optimistic expectations. Having run into a brick wall over the past couple of months, dollar investors just needed an excuse to off load the currency.

The dollar's problems have been compounded by a belief that Japanese and German interest rates are about to embark on an upward trajectory, a belief which has proved supportive of the yen to some extent but the deutschmark in particular.

Nervousness about the German interest rate outlook has been totally overdone. For one thing, the German economic recovery is still fragile and higher rates could seriously threaten its sustainability.

Secondly, an upturn in the rate cycle would seriously damage the EMU dream at this stage, particularly given the very precarious state of the French economy.

France simply could not live with higher rates. In fact its rates are still well above where they should be, given the weakness of the economy and the need for further fiscal retrenchment in the second half of the year to stop the upward spiral of the budget deficit. This would certainly influence Bundesbank thinking on rates over the coming months.

Finally, the recent appreciation of the deutschmark is exactly what the German economy does not need at this stage. The timing and manner in which Dr Tietmeyer, president of the Bundesbank, delivered his interest rate message on Tuesday was no coincidence. The bottom line is that the Bundesbank would most likely cut the rep orate further over the coming months to take the wind out of the currency and keep EMU alive.

From Ireland's point of view, the key problem is that sterling insists on behaving like a European dollar rather than an EMU aspirant. Sterling was dragged down in an unceremonious fashion by the dollar and true to form, the Irish pound followed suit.

The reality is that the financial markets still view the Irish pound as a sterling satellite and certainly the performance of the currency over the past week would do little to enhance our reputation as a hard core currency. This could be a major consideration when the decision is taken in 1998 on which currencies would actually participate in the single currency.

However, it is not all bad news. Domestic interest rate prospects have been enhanced by the turbulence of recent days. The strengthening of the Irish pound against sterling will help alleviate inflation fears from that particular source, while hard core EMU interest rates would continue to have a downward bias.

Having bought into EMU, Ireland would have to accept that one of the consequences will be a narrowing of the German/Irish interest rate differential. Even so, this differential has actually widened in recent weeks, raising once again the question of Ireland's suitability for EMU.

While the turbulence of this week would most likely fizzle out over the coming days and stability return, it has left a few reminders which would be dangerous to ignore.

The dollar is still key to European financial stability and its stability is far from assured.

Sterling does behave more like a European dollar than a potential EMU currency and it can from time to time collapse in a heap. Finally and most importantly, the markets still regard the Irish pound as a sterling satellite and no amount of effort would change this perception of reality.