It ended at 107.9, up 0.5, matching its peak in January 1989 and the strongest since the start of 1986. Against the German mark it gained a pfennig to rise above DM3.06, close to last summer's peak.
Analysts were at a loss to explain the surge yesterday. Trading volumes were not unusually heavy and there was little news to affect the currency markets.
The main rationale given for the renewed strength of sterling yesterday was the fact that there was no more attractive currency around. But that will have been scant comfort to either Gordon Brown, the Chancellor of the Exchequer, or the Bank of England as the chorus of complaint from exporting industries grows.
Ian Peters, deputy director of the British Chambers of Commerce (BCC), said yesterday: "This means more pain for industry and more damage to our export effort. This is beginning to be a very serious situation."
The latest trade figures due on Thursday are widely expected to show another pounds 1bn-plus monthly shortfall of exports compared to imports in January. The underlying trend in visible trade has been deteriorating for the past few months, with export volumes declining while import volumes continue to grow strongly.
The Chancellor said at the weekend that he was concerned about the impact of the strong pound on exporters, but short-term worries could not override the long-term goal of stability.
"This is not what Labour's sterling crises were supposed to be about," said Alison Cottrell of Paine Webber. The currency markets had welcomed Mr Brown's tough Budget, she said.
Like most analysts in the City, the Treasury expects the pound to fall in value at some stage. The catch is that this might not happen until the summer or later.
Yesterday's jump in oil prices, along with events in Russia, helped propel sterling higher. It has a residual petro-currency status, and was also boosted by the fact that turmoil in eastern Europe always tends to weaken the German mark.
An additional factor is the publication tomorrow of the long-awaited reports on the single currency from the European Commission and the European Monetary Institute (EMI).
The membership of 11 countries from the start is now assured, despite the fact that some will not meet all of the Maastricht criteria. But the EMI report is expected to be critical of the budget policies of some member governments, notably Italy.
Theo Waigel, Germany's Finance Minister, has moved to quell fears that pressing ahead with a broad membership will make EMU unstable by proposing that the start of the "stability pact", an agreement on tough fiscal policies, should be brought forward to this summer.
His proposals have been welcomed by Yves-Thibault de Silguy, the EU's monetary affairs commissioner, although they would need to be agreed by heads of government at the special EMU summit in early May.
Even so, some financial analysts predict the German mark could weaken if the reports this week are unexpectedly critical of the likely EMU members. Some also see a possibility of a final revaluation for "peripheral" currencies such as the Spanish peseta and Finnish markka.
Underlying all of these short-term considerations driving the pound upwards lies the fundamental fact that the UK economy remains very buoyant, while the continental ones are not yet picking up strongly. This divergence is reflected in long-term interest rates in Britain that remain well over a percentage point higher than the equivalent rates in Germany.
"Until the Bank of England is prepared to signal it thinks interest rates have probably gone high enough, there will be no great release of breath in the markets," said Ms Cottrell.
With the Bank's Monetary Policy Committee not due to meet for another two weeks, however, there appears little prospect of short-term relief for Britain's export industries.Reuse content