Pound hits 26-year high fuelling further interest rate hike

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Having breached the psychologically- important $2 barrier last week, sterling added two cents to trade at $2.02 last night.

The last time the pound was at these levels, Ronald Reagan was in the White House and Bucks Fizz were topping the charts.

The rise is good news for tourists heading to the U.S., but British firms exporting to America will find their goods are less competitive. Imports from the U.S. will be cheaper.

Experts said the pound was likely to stay above the two-dollar mark for some time as more rate rises are predicted from the Bank of England's monetary policy committee to try to keep a lid on inflation and calm the runaway housing market.

Economist Howard Archer, of Global Insight, said: "The pound is being buoyed by general belief that the Bank will lift interest rates to 5.75 per cent on Thursday."

A quarter point rise to 5.75 per cent will put rates half a per cent higher than those in the U.S. That means investors will make a bigger return on their money if it is in sterling than if they keep it in dollars.

Worries about the U.S. housing slowdown have also helped weaken the dollar.