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Last Updated: Friday, 26 January 2007, 10:27 GMT
Pound close to $2 exchange level
Pound coins
A stronger pound will have a mixed impact on the UK economy
Sterling hit a 14-year record against the US dollar and Japanese yen as high UK interest rates attracted investors.

The pound rose above $1.99 on currency exchanges, almost breaking the key $2 rate. Against the yen it hit 241.42, a level not seen since September 1992.

Analysts said the shock interest rate rise by the Bank of England had seen many investors shift into the pound and sterling-denominated assets.

A strong pound is usually good news for UK shoppers, but may hurt exporters.

The pound fell back slightly to $1.9825 in late trading.

Market moves

Investors hunt countries or currencies where they can get the best return on their capital.

High interest rates attract money, especially if other nations have not raised their borrowing costs in line with the changes.

Graph of pound vs dollar

Two weeks ago, the Bank of England raised its main interest rate by a quarter of a percentage point to 5.25% and many analysts are expecting further increases.

The $2 level is a big psychological one and the market wants to see it
Alain Delelis
Bank of America

In Japan by contrast, the central bank kept its main borrowing cost at 0.25% last month, while in the US the key rate was left on hold at 5.25% earlier this month after 17 consecutive increases between June 2004 and June this year.

Traders said that many investors were borrowing money in Japan, where money was now relatively cheap, and buying into the pound to benefit from the higher interest rates that were on offer in the UK.

The strong pound is good news for UK shoppers planning to travel to the US and Japan. However, it is bad news for UK exporters, as it means their products will be more expensive in those countries.

"The $2 level is a big psychological one and the market wants to see," said Alain Delelis, a trader at Bank of America.

However, he warned that while the pound may continue to get stronger, there remained the risk of a sudden correction back down to lower levels.

"I think this time it will reach it but there are concerns about valuation and at some point it will turn and people will see big losses," he said.

Your comments

There has never been a better time to buy US dollars. I've just come back from the US, and have got a load of USD in cash. I'm holding on to it until the rate drops back. Buy low sell high as they say!
Peter, London

I am a British student in the States and a strong pound only helps me out here. In the last 3 years I have very little worry as when I come home to work in the summer I make double what my friends and colleagues make in the USA. Shopping, eating out and those luxuries are more frequent for me over here. The UK is so expensive!!!
Robert MacNeill, Knoxville, TN

Guess I'll have to put my UK trip on hold. Even when pound was 1.60, prices in England were high compared to USA. Now at 1.98 - it is an absolute rip off for American tourists. With this exchange rate, British visitors to the USA can live "big" here.
Jay Alan, Owego, NY, USA

I work in the tourism industry. If a strong pound means that more people being able to come here and have that much more money to spend, then I am all for it.
Jonathan, Seattle, WA, USA

This is brilliant! I am off to the USA for shopping soon. More dollars for my pounds! Great for a student like me!
Pritesh Chudasama, Northolt, Middlesex

I still have US$ in the USA from a previous employment and if we transferred it now it would realise a 15% reduction of its previous value. This is double bad as we went to the US when it was at $1.55 to the and had to use sterling to buy a car! Ho hum....market forces!
Ian, Uckfield, East Sussex

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