dollar was so weak against sterling when the United Kingdom economy was itself in such a poor state.

According to Mr. Jan Birkenheim, manager of the Bank of Bermuda's treasury department, the powerful German deutsche mark is largely to blame.

Sterling and all the other currencies in Europe's Exchange Rate Mechanism (ERM) are pegged to the deutsche mark. So when the German currency is strong against the dollar, it drags all the other currencies with it.

And the reason the deutsche mark is so strong is because of high interest rates brought about by the unification of the former east and west Germanys, said Mr. Birkenheim.

"The German mark is so strong because of high interest rates in Germany (9.75 percent) compared with a rate of 3.25 percent in the US,'' he said. "In the UK, the rate is about 10.25 percent.'' Devaluation of sterling was a "very high'' possibility despite assurances to the contrary from the Bank of England, said Mr. Birkenheim.

"People prefer to hold deutsche marks since they would only give away less than one percent (in interest rates),'' he said.

He added: "The reason behind the high German interest rate is the cost of unification.

"That forced the Government budget deficit up to very high levels in Germany.

In order to control inflation, the Bundesbank wants to have very high level interest rates.''