The pound has risen briefly above $2 - close to record highs - as investors expect an interest rate rise in July.
The exchange rate is good news for Brits visiting the US
In early trade in Europe, one pound touched $2.0006, almost reaching May's 26-year high of $2.013 dollars.
Bank of England minutes released last week showed that the main rate-setting committee voted five members to four to freeze rates at 5.5% in June.
Analysts said this makes an interest rate rise to 5.75% in July a near certainty, in a bid to beat inflation.
Good for tourists
Expectations of higher interest rates make the pound more popular amoung currency investors, as they can gain a higher return.
The pound, which later slipped a fraction to 1.9969 dollars by late-afternoon, has gained 8% against the dollar over the past 12 months.
While the stronger pound is good news for British tourists hunting for bargains in the US, it does not augur well for UK exporters, who could suffer as their goods become more expensive.
David Kern, economic adviser to the British Chambers of Commerce, said the higher pound acted as a brake on the economy.
"We appreciate that the MPC [Monetary Policy Committee] has to control inflation, but a stronger pound performs a similar role in dampening economic activity," said Mr Kern.
Among the four members to vote for a quarter point rate rise in June was Bank of England Governor Mervyn King.
The Bank chief has repeatedly expressed his desire to bring back consumer price inflation to below the government's 2% target.
It fell to 2.5% in May from 2.8% the previous month.
Some analysts expect UK interest rates to be as high as 6% by the end of this year.