FINANCIAL MARKETS : CURRENCY : Dollar Falls Against British Pound, Yen

The pound took center stage in foreign exchange trading, sending the dollar to an 18-month low against the British currency.

The dollar also plunged to its lowest level in nearly five months against the Japanese yen on speculation that interest rates in Japan are headed higher.

“The British pound is the whole story,” said Robert Ryan, chief foreign exchange dealer with Bank of New York, summing up the day.

Sterling’s rise came amid continuing speculation that Britain will soon join Western Europe’s currency-steadying exchange rate mechanism, known as the ERM.

Built into the European Monetary System, the ERM limits the fluctuations of nine of the 12 European Economic Community countries. Britain, Greece and Portugal are the three countries still outside the system.

In London, the pound rose by 1 cent from Monday to $1.816--its highest rate against the dollar since Jan. 3, 1989, when it reached $1.827. At its peak Tuesday, the pound reached $1.827 and buying was extremely heavy, dealers said.

In later New York trading, sterling also advanced sharply, rising to $1.822 from $1.808 Monday.

The yen rose after a Washington-based advisory firm, Smick Medley, predicted that the Bank of Japan will raise interest rates during the next few months.

The dollar plunged to 148.225 yen in New York from Monday’s 151.15. In Tokyo overnight, the dollar dropped to 149.60 yen from 150.70 late Monday, and it was quoted lower in London at 148.85.