The pound has continued its drift downward against both sterling and the deutschmark in what some analysts believe will be a precursor to substantial selling in the weeks ahead. The pound closed at 86.50p against sterling in late trade from 86.64p on Wednesday and at DM2.5625 from DM2.5637.

Mr Jim Power, chief economist at Bank of Ireland, said there had been a steady trickle of selling from Irish corporates as well as some speculative overseas selling of the pound.

"The amounts have not been huge but the direction is all one way," he noted.

The selling is occurring despite the continued strength of sterling against the Dmark. While it failed to breach the DM3.0 level, Mr Power said it was likely to remain above DM2.95 during January. He added that traders would attempt to take it over DM3 again but that the bias over the coming three or four months was in a downward direction.

Dr Dan McLaughlin, chief economist at Riada Stockbrokers, warned that the pound could fall as low as 85p if international selling set in next week.

At the moment, volumes were very low but as traders returned to their desks next week another wave of speculative selling was possible, he noted. In addition, Irish corporates were, in general, well covered at higher prices and were unlikely to support the market in the short term, he noted.

Both Mr Power and Dr McLaughlin say there is a growing conviction that there will be no revaluation of the pound over the coming months.

However, Mr Power insisted that DM2.55 and 86p will provide a floor over the coming weeks. "It would be brave to sell the pound aggressively as last time many got badly burned when the pound quickly bounced back up above DM2.62. However, it will happen over the next couple of months."

He added that corporate Ireland was now of the view that a revaluation was not on the cards and thus the pound was still trading too high.

According to Dr McLaughlin, there is very little left to play for in a revaluation. He pointed to the pound's position against the ECU central rate, which, he added, was the parity which would be changed in a revaluation. "There is only a three percentage point differential," he noted.

When the revaluation speculation first emerged, the pound was trading at up to 13 per cent above the weakest currency in the system. Yesterday it was only 6.3 per cent above the Dutch guilder - the weakest currency in the system.

If the Government had the option of accepting another competitive gain on top of the effective devaluation of the currency this year, it would be odd not to do so, he suggested.

However, much will depend on the credit figures next week. Under normal circumstances, the combination of rapidly growing credit as well as a declining currency would have persuaded the Central Bank to raise interest rates. With monetary union now only months away that cannot happen. However, strong credit numbers are still likely to put rate cuts back and thus will hold the currency higher than it might otherwise be.