AS sterling continues its inexorable rise on foreign exchange markets, exporters must be wondering where it will end. The latest upsurge has taken the pound decisively above three Deutschmarks in anticipation of further increases in interest rates by the Bank of England to quell the consumer boom. In the past 12 months it has gained nearly 30% against the German currency. By any standards sterling is overvalued, especially against the continental currencies, which are crucially important to Britain's overseas trade. So strong are the flows of international money that it is virtually impossible for central banks to regulate currency markets. Sterling's exaggerated strength owes as much to the weakness of the mark and the other currencies inside Europe's exchange rate mechanism as it does to the outlook for interest rates. The mark has suffered from fears that a European single currency, due

to start within 18 months, will be weakened by the participation of the Mediterranean countries - Italy, Spain, and Portugal. Sterling has become a safe haven as it was in the Gulf war. None of the pundits foresaw sterling's heady gains over the past year, and although they are now forecasting that it will fall from grace, there are dangers in taking this for granted.

The strong pound has reduced the cost of imports, but has not yet had a dramatic impact on exports. But there are clear enough signs that manufacturers are finding it increasingly difficult to win export business. In due course this is expected to result in an increasing current account deficit. Britain had a surplus in the first three months of this year, but this will be quickly eroded by the effects of the strong pound. Independent economists, polled by Reuters, the international news agency, believe that as the current account moves into deficit sterling will lose its attractions to international investors. They are forecasting that over the next two years the pound will surrender more than half the gains it has made in the past 12 months. There are other factors which might take the heat off sterling - signs that higher interest rates were cooling down the economy or an end to the uncertainties

over the single currency. But there are no certainties on foreign exchange markets: the same economists were wide of the mark in the prediction they made a year ago.

After the Budget sterling became a one-way bet. Financial markets had spotted how little the Chancellor of the Exchequer, Gordon Brown, had done to raise taxes on the personal sector even before he sat down. The only significant measure was the reduction from 15% to 10% in the tax relief on mortgage interest payments, but that does not come into effect until April. The clear implication was that the Bank of England would have to raise interest rates. It did so last week and may have to do so again next month. By any standards rates are nowhere near their peak. Meanwhile manufacturers are left to bear the strain, and it is difficult to see how they can emerge unscathed. In due course Mr Brown will wake up to the fact that his ill thought out Budget has done permanent damage to the manufacturers he was trying to entice to invest more.