Pound passes two-dollar barrier

Sterling hit its strongest level against the dollar for more than 14 years as inflation figures revealed the Consumer Prices Index (CPI) surged ahead to a far higher than expected 3.1% last month.

The pound's position was helped by inflation data also out on Tuesday from the US showing that America's core CPI rose by just 2.5%, less than the 2.6% predicted by economists.

The UK's soaring cost of living led to the Governor of the Bank of England writing a letter of explanation to the Chancellor for the first time and has created fears that interest rates will need to rise steeper and for longer.

Concerns were mounting that the Bank may take the unusual step of raising rates by a half point to 5.75% next month as it seeks to curb the country's economy. The US Federal Reserve meanwhile is expected to cut base rates to halt its economic decline, which has been hit by a recent slowdown in the housing market.

GFT Global markets currency expert Martin Slaney said sterling was now likely to beat the 2.012 US dollar level seen just after Black Wednesday in September 1992, when the pound dropped out of the European Exchange Rate Mechanism.

The London market dropped sharply as investors moved away from stocks reliant on the US currency, with the FTSE 100 Index down by as much as 60 points before recovering later in the session. Manufacturers were also feeling the pinch as the pound's strength was expected to hit their bottom line on export goods.

But the rise in the pound against the dollar is good news for Britons crossing the Atlantic. Commission-free tourist rates now sit at around 1.90 US dollars against just 1.69 in April last year. Foreign exchange giant Travelex said it had already seen a surge in demand for US dollars.

Anthony Wagerman, managing director of Travelex's retail business, said: "While the euro remains the number one selling currency in the UK market, there's a good chance that the dollar may temporarily knock it off the top spot as transatlantic travellers from the UK cash in."

But shoppers hoping to make the most of the favourable exchange rate will have to stick by the £145 limit on all goods, including gifts and souvenirs, from non-European Union countries or face paying UK tax.