The pound has come under renewed pressure in the ERM band following a fresh surge in both the dollar and sterling. The pound closed at over 12 per cent stronger than the weakest currency in the system as it gained over two pfennigs against the deutschmark to close in late trading at 2.6995 marks, from DM2.6738. It fell slightly against sterling to close at 88.55p from 88.93p on Thursday.

The heavy selling pressure of the previous few days dissipated yesterday. Dealers are wary of getting caught short of the currency over the weekend when a revaluation could be ordered. The long weekend here only added to these fears. The rise against the deutschmark also eased pressure on the trade-weighted exchange rate, which is thought to be closely watched by the Central Bank. On Thursday the index had drifted down to 66.1 compared to lows of 65.7 at the time of the last interest rate rise in May. However, yesterday's buying boosted the index out of danger territory once again.

Economists said next week will be very important in determining the future of the pound. The Bank of England is meeting on Wednesday and Thursday when the new policy committee will announce whether or not it is implementing another interest rate increase.

Mr Jim Power, chief economist at Bank of Ireland, said another rate rise would push sterling towards DM3.05 and hence increase pressure on the pound. On the other hand failure to announce a further increase would see sterling heading for DM2.98 which could bring the pound back to above 89p, he said.

Thursday will also be very important from an Irish perspective, Dr Dan McLaughlin, chief economist at Riada Stockbrokers, noted. He is expecting the July inflation data to show some impact from the pound's fall against sterling over the past few months. In addition, credit data will also be released by the Central Bank.

Dr McLaughlin is expecting credit borrowing to accelerate to over 20 per cent for June following the massive borrowing for the Norwich Union share issue.

Mr Power also pointed out that some supermarket chains have begun posting notices blaming the rise in sterling for price increases. If sustained, price rises of this sort could quickly pass through to the retail price index, he said. A combination of accelerating inflation and credit could increase pressure for an interest rate rise.

Other pressures are also building around Europe and in the US. Yesterday's US jobless figures were so strong that the market is no longer ruling out a rate rise there when the Federal Reserve next meets on August 19th. However, Mr Power said most of the focus will probably remain on the next meeting on September 30th.

The Bundesbank's recent indications also point towards a possible rate rise in Germany over the next month or so. Dr McLaughlin pointed out that copying the possible German rate rise could prove a good option for the Central Bank in trying to keep inflation under control.

The US jobs data and the possibility of higher German interest rates have also prompted a setback in US and European bond markets. The Irish five-year bond fell 10p to yield 5.84 per cent.