THE pound fell below 90p against sterling in a roller-coaster day for the Irish currency.

Sterling held on to the bulk of this week's sharp gains, climbing to its highest level against the deutschmark since August 1991, due to expectations of further British interest rate increases.

Sterling has now cleared its old central parity in the European Exchange Rate Mechanism (ERM) at DM2.95, a target which proved unsustainable during Britain's abortive membership of the system between 1990 and 1992.

Traders said yesterday, however, that there was little to stop sterling rising to DM3 and beyond in the weeks ahead.

"Everyone and his mother and brother wants to buy sterling at the moment. Even on a quiet day like today, there was still demand out of the US," said Mr Peter Wood, currency trader at Bank of Boston in London.

While the pound opened strongly against the deutschmark at DM2.68, it came under a lot of selling pressure from overseas speculators, driving it down to DM2.6672 at the close.

At the same time it fell to below 90p against sterling before closing at 90.10p from 91.01p a day earlier.

Mr Jim O'Leary, chief economist at Davy Stockbrokers, said Irish corporates began buying the pound as it fell below 90p helping to push it up slightly.

The pound has risen in recent weeks against the deutschmark, on a growing belief that a revaluation of the pound's central rate in the ERM will soon be implemented.

However current levels imply a substantial revaluation of 7 per cent which markets believe may not be realised, hence the selling pressure.

Mr O'Leary warned that if the revaluation is not announced soon the markets may stop believing in it and serious overseas selling pressure could again emerge.

If that happens the pound could fall to 88p against sterling, if the UK currency remains at its current levels against the mark, he warned.

He added that the moves were putting a little bit of pressure on interest rates with one-year money becoming slightly more expensive. It is now possible that the authorities may opt for an increase in rates rather than a revaluation he said.

"If the only thing driving exchange rate policy is our entry level for the euro then there is no case at all for a revaluation," according to Mr O'Leary.

"However, the authorities may also be concerned at the possible behaviour of the pound in the meantime.

He added that if sterling appreciates further, heading towards DM3, the pound will find it very difficult to follow.

"There may be reasonable corporate support at 90p but their firepower is far smaller than the firepower of the international speculators," he noted.