The pound has hit a 14-year high against the dollar amid speculation that the Bank of England will raise interest rates in the New Year.
The pound has not been this high against the dollar since 1992
The pound rose as high as $1.9696 on the currency exchanges, its highest level against the dollar since 1992, before slipping back slightly.
Interest rate rises are now more likely in early 2007 after the Nationwide said house prices rose strongly in November.
UK interest rates are currently at 5%, after this month's quarter-point rise.
By late evening, the pound was worth $1.9657, still up more than 1% on the day.
The strong pound is good news for UK shoppers planning to travel to New York or other big US cities to buy their Christmas presents.
However, it is bad news for UK exporters, as it means their products will be more expensive in the US.
While sterling has been boosted by recent UK interest rate rises, the dollar has been hit over the past weeks by poor US economic data.
Businesses in the US Midwest reported the first contraction in economic activity in more than three years on Thursday, putting further pressure on the currency.
The pound is now at its highest level since so-called Black Wednesday in September 1992, when it crashed out of the European Exchange Rate Mechanism (ERM) under John Major's Conservative government.
The dollar also fell to a 20-month low against the euro.
Despite this, US stock markets were relatively unaffected. The Dow Jones benchmark index dropped just 4.80 points.
Investors said the scenario of rising interest rates across Europe and a slowing US economy, which makes further monetary tightening by the Federal Reserve increasingly unlikely, was hurting the dollar.
"In the end, it is all about rates," said David Durrant, a senior currency strategist at Bank Julius Baer in New York.
"Higher rates of return in Europe will push the dollar lower."