The pound has set a new record against the euro, raising fresh doubts about whether the UK should join the single currency.

The pound was trading at 1.642 to the euro, the equivalent of DM3.21 - far higher than when Britain was forced out of the exchange rate mechanism in 1992.

This week one euro has bought just 60p, as compared to more than 70p at its launch in January 1999.

The pound has been rising because of the weakness of the Eurozone economy, which has weakened its currency, and because of the widespread belief that interest rates will rise more quickly in the UK than elsewhere.

But the high pound could make it harder for the government to consider joining the single currency after the next election.

Entering the euro at too high an exchange rate could permanently damage British manufacturers, whose products would be made uncompetitive against their European rivals.

The development has also put British businesses, many of whom back euro entry, in a dilemma.

"In twenty years time I don't think the rate will be very important. But for the first five years (after joining), it will be crucial," said Kate Barker, chief economist of the CBI.

Sterling sparkles

Sterling's rise has mirrored the problems with the euro, which again touched parity with the dollar this week.

Traders are still unclear whether the European Central Bank (ECB), which manages the currency, wants it to fall further to help boost growth, or wants to keep the exchange rate stable.

The failure of a major economic summit in Tokyo at the weekend to mention the problems of the euro contributed to the belief that the authorities were unlikely to do anything to stop it falling further.

Then there is the interest rate differential.

Interest rates in the UK are 5.75%, compared to 3% in the eurozone.

Most analysts believe that in the next six months the UK rate will rise to at least 7%, while the ECB is still reluctant to jeopardise the fragile German recovery with an interest rate rise.

Overall, interest rates make it more attractive to hold sterling.

There is little fear among investors that they will lose out from higher inflation in the UK - as a result of growing confidence in the ability of an independent Bank of England to keep inflation in check.

The rising pound in turn, helps keep inflation low by making imports cheap.

ECB talks tough

The fears of British business have been made worse by remarks by Wim Duisenberg, the head of the European Central Bank.

He made it clear that the UK would have to meet all the conditions for entry, including a stable rate of exchange against the euro over a two year period.

But some economists believe that in the longer term, as economic growth picks up in the eurozone, sterling will weaken, making British membership more feasible.

"The conditions that will make a referendum winnable will mean euroland will be doing a lot better than it is now. And in that environment, sterling will be falling," says Pal Meggyesi of Deutsche Bank.

But that could be years in the future. In the meanwhile, British eurosceptics have found one more reason to dislike the euro.