THE pound traded over 103p against sterling for the first time in three weeks but fell below its central rate against the deutschmark yesterday on signs from the US that interest rates are unlikely to rise.

However, the rise was not sustained and the pound closed at 102.90p, the same level as the previous day. Economists predict it is only a matter of days before the pound breaches the 103p level once again.

The pound has fallen back in the ERM "grid" and closed yesterday fourth from the bottom of the table. The Spanish peseta, Dutch guilder, Belgian franc and deutschmark were all above the pound. In recent weeks the pound had been as high as third place.

Three month interest rates closed at 5.25 per cent, from 5.12 per cent a day earlier the highest level since January 29th. Traders said the move was ahead of inflation data due out tomorrow. "There are worries that we could see a high number which would worry the Central Bank", one trader said.

In the first sign that the US economy may not be as strong as many had feared, US housing starts fell 4.7 per cent in May, according to figures from the Commerce Department. Wall Street economists had predicted a 1 per cent decline.

The housing data are important because US mortgages are almost all based on long term fixed rates or the long bond yield. The US long bond has gone from under 6 per cent to over 7 per cent in the last six months.

As a result housing starts had been expected to show a decline. Analysts are now relieved that this has eventually come through - easing fears that the US Federal Reserve would have to increase interest rates to ease the pressure.

Mr Eoin Fahy, chief economist at Ulster Bank Markets, said the data were the first signs that the US economy was not experiencing a boom. It now looks as if the US is experiencing stable growth, making the chances of an interest rate increase much slimmer.

"This is good news for Irish borrowers," he added. Most markets still look to the US for a lead and stable interest rates there make rate hikes across Europe less likely, he said.

Although this was good news for US bond markets, the dollar suffered and fell against the Dmark, and yen and sterling followed it lower.

The D mark was also buoyed by comments from Bundesbank council member Mr Edgar Meister who said there was still some hope for further easing of German interest rates.