Pound reaches a new 26-year high above $2.10

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Traders said the latest dollar weakness reflected speculation that China may shift more of its foreign currency reserves away from the greenback.

The speculation follows vice chairman of China's National People's Congress Cheng Siwei urging finance bosses to transfer its forex reserves to "stronger" currencies.

The euro earlier jumped to a new record against the dollar, while predictions that the Bank of England will keep interest rates at 5.75 per cent tomorrow also made the pound a better bet against the dollar.

James Hughes, an analyst at CMC Markets, said: "This is the first time the pair has been at these levels since May 1981, but the rally is being driven by dollar weakness as opposed to pound strength.

"Speculation that the Chinese government may further diversify its currency reserves is being seen as largely responsible for this move."

Rising oil prices have also supported European currencies because of speculation that oil-exporting nations were selling dollars earned from petroleum sales to buy more euros.

The latest slide in the value of the dollar put pressure on global stock markets, with the FTSE 100 Index losing early gains to stand more than 80 points lower. Royal Bank of Scotland and Barclays were among the heaviest fallers.

Mr Hughes added: "The big move (in the dollar) has caught people by surprise and it has affected the US futures market, which is weighing on indexes in Europe and London."