THE prospect of an imminent rise in US interest rates overshadowed the markets yesterday, with most dealers betting on a rate increase today.

While most European markets were closed for a public holiday, the dollar rose sharply on foreign exchange markets ahead of the US Central Bank's Federal Open Market Committee meeting today. The bank is expected to sanction a quarter of a percentage point rise in US rates at the meeting.

The pound, however, was unchanged on the currency markets, holding steady against sterling and the deutschmark. The Irish currency continued to trade at around 93p against sterling, and DM2.600. The pound was also unchanged against the dollar, trading at $1.52.

The dollar, after stumbling because of a sharp jump in Japan's trade surplus, gained over a pfennig and clawed back early yen losses in what dealers described as speculative buying, probably from the other side of the Atlantic. Its effect was exaggerated by the holidays in most of Europe which subdued turnover.

Economists were split over the likelihood of a raise in US rates at the FOMC, but some see the odds improving.

"The markets, up until the end of last week, were of the opinion that US rates weren't going to go up.... but the Dow's fall on Friday has made the market stop and think a little bit that it's no longer a one way bet," said Mr Jeremy Stretch, currency strategist at Nat West markets.

A rise in US rates today would boost the dollar against the deutschmark and yen after its recent stumble against both currencies as dollar denominated assets become attractive to investors.