THE Central Bank has been selling Irish pounds, taking advantage of a volatile day on the foreign exchange markets.

After small amounts of intervention early in the week, the Central Bank yesterday took advantage of temporary sterling weakness, to attempt to stop the pound's runaway flight at the top of the ERM grid. It sold a "substantial" amount of pounds for deutschmarks, sources said.

The pound closed yesterday at 98.26p against sterling from 98.21p a day earlier and at 2.6205 deutschmarks from 2.6207. It remains well above all the other ERM currencies.

The pound initially gained against sterling after figures showed a drop in UK manufacturing production, Mr Pat O'Sullivan, economist at AIB, said. However, US employment figures later in the day drove the dollar higher. Sterling followed in its wake, ret racing some of its earlier losses.

Apart from a brief period immediately before the devaluation in 1993, these levels are the highest for the pound since 1981.

The rises meant a second revaluation of the agricultural "green pound within months. The Irish CoOperative Organisation Society, is expecting a 4 per cent fall in farming incomes as a result.

The continued strength of the pound is also putting pressure on money market rates. While most analysts are ruling out an official interest rate increase at the moment, Dr Dan McLaughlin, chief economist at Riada Stockbrokers, is expecting a rise in mortgage rates before the end of February.

He does not expect an official to rise from the Central Bank. But if the key one month money rate rises to 6 per cent we can expect a retail rise, he said. One month money was trading at 5 7/8 per cent.

Higher interest rates will be more likely if the dollar and sterling continue to strengthen with the deutschmark remaining weak. Mrs Jim Power, chief economist at Bank of Ireland, said the currency markets focus is now firmly on the US.

"There is now clear evidence that the US economy is bouncing back. That will keep the dollar well supported and the mark weak," he said. As a result the pound will remain at the top of the ERM band and weak against sterling.

According to figures issued yesterday, the US unemployment rate was 5.3 per cent in December, the same as in November and in line with market expectations. But the economy created a surprising 262,000 jobs, well above the 190,000 expected by analysts. The hourly wage rose by 0.5 per cent to $12.05 dollars, with a 3.8 per cent rise over 12 months.

A broader quarterly survey of wage costs will be issued at the end of this month, shortly before the next meeting of the Federal Reserve. "This makes a rate hike at that meeting more likely," Dr McLaughlin said.

Sterling was driven lower by profit taking following soft British manufacturing and industrial data. The Confederation of British Industry distributive trades survey for December published yesterday also put some pressure on the pound, showing retail sales volumes for last month were less than expected.

Most analysts now agree that the prospect of a UK rate rise next week receding. Nevertheless, Mr Powers even if the Bank of England leaves rates unchanged sterling will continue to edge up to 2.70 deutschmarks. "That would bring the pound to below 98p," he added.

At the same time the mark weakened against many other Europeans currencies, prompting intervention to prop it up from central banks in Spain, Denmark, Finland and Portugal. Sweden was also rumoured to be in.

Many European countries as well as Ireland have been locked in a struggle to prevent their currencies from appreciating further in order to avoid losing export competitiveness.