Strong pound approaches $2 mark

The pound has risen nearly 15% against the dollar this year

The pound has drawn closer to the $2 barrier, hitting a new 14-year high of $1.9847 before easing slightly.

Investors are buying sterling as they expect the Bank of England to raise interest rates in 2007, while a weaker US economy could see rate cuts there.

Higher interest rates help strengthen a currency by making investments in that denomination more attractive.

But there are signs that the strong pound is hurting UK exporters, whose goods become more expensive in the US.

In late trading, a pound sterling could buy $1.981.

The dollar also weakened against the yen and the euro, slipping to a 20-month low against the eurozone currency after figures showed a contraction in US manufacturing activity.

Business implications

The latest monthly CIPS data on UK manufacturing activity showed a marked fall in factory orders in November, which some economists said was connected to the strong pound hitting exports.

"Against the background of an expanding eurozone, that is slightly surprising," said Philip Shaw, an economist at Investec.

"This could be a warning of things to come if sterling remains as robust as it has been against the dollar and the euro to a certain extent as well."

Track the pound against the dollar Q&A: The fall of the dollar

The disappointing CIPS data suggested that the Bank of England might not be so keen to raise UK interest rates in the near future and prompted some profit-taking from traders.

As well as making UK firms less competitive in US markets, a strong currency also devalues the value of dollar earnings made there.

Many of Britain's largest firms, including Astra Zeneca, Hanson, BP, BAE Systems and Unilever, rely on the US for much of their profits.

The dollar's relentless slide this year has seen it fall in value by nearly 15% against sterling.

For some, this is good news - particularly for UK shoppers planning to travel to New York or other big US cities to buy their Christmas presents.

On reaching $1.9748, the pound had hit its highest level against the dollar since Black Wednesday in September 1992, when it crashed out of the European Exchange Rate Mechanism (ERM) under John Major's Conservative government.