The pound has gained against sterling and fallen back against the deutschmark in active dealing on the markets. Mr Jim Power, chief economist at Bank of Ireland, said the markets now believe that whether or not the pound's central ERM rate is revalued, it is too high at the moment.

As a result, in one of the busiest day's trading in some weeks, the pound fell over 2 pfennigs to close at DM2.5747 from DM2.5956 on Saturday. At the same time it gained slightly against sterling to close at 88.98p from 88.59p.

Sterling itself lost almost 1 per cent against the dollar and deutschmark as traders' marked down their interest rate expectations. Sterling fell as low as DM2.8873 from DM2.9215 at the close on Friday. Mr Kevin Daly, economist at Ulster Bank in Dublin, said the OECD report, which suggested there would be no more rate rises in the UK, was partly responsible for the fall.

The OECD said the pace of UK growth is likely to slow in 1998 following sterling's strength, interest rate rises and fiscal tightening. It predicted that UK growth will be 3.4 per cent in 1997 and 2.2 per cent in 1998.

However, Mr Daly added, there is still a possibility that there will be one more rate rise in the UK which could boost the currency short-term in January or February.

"The overall trend is down, the only question is whether it raises its head one more time before falling," he said.

This could make the Minister for Finance, Mr McCreevy's decision to revalue more difficult. If sterling does strengthen again early next year it will be difficult to resist the pressure for a revaluation. However, he will also be keenly aware of the possibility that the British currency could fall rapidly again.

According to Mr Power, the fact that sterling has lost 10 pfennigs in a week, underlines its volatility and the dilemma facing the Irish authorities. "Revaluation would be very silly given the volatility of sterling," he noted.

Most of the recent selling, according to Mr Power, has been overseas players selling against the German currency. However, Mr Daly also pointed to significant selling of the pound against sterling which kept it capped at 89p.

He also noted that some overseas players had believed that a revaluation announcement was possible at the weekend summit in Luxembourg. When that failed to materialise, the sell orders were put on.

According to Mr Power, sterling will now probably fall towards DM2.85 which would allow the pound to trade as high as 90p before Christmas.