The pound hit its highest value against the dollar since January today after the chairman of the US Federal Reserve signalled that further efforts to boost recovery were on the cards.
Delivering a speech on monetary policy in Boston, Ben Bernanke said the central bank was prepared to pump more money into the world's biggest economy to jump-start growth and fend off deflation fears.
A further programme of quantitative easing (QE) in the US would mean putting more dollars into circulation and that has depressed the greenback, leaving it at a 15-year-low against the Japanese yen.
Following Mr Bernanke's remarks, the dollar fell further against its rivals, as the pound lifted to 1.61 dollars and the euro also hit its highest level since January at 1.41 dollars.
Mr Bernanke said the Fed was currently wrestling with the size of a potential QE programme, and added: "We have much less experience in judging the economic effects of this, which makes it challenging to determine the appropriate quantity and pace of purchases."
Mr Bernanke said inflation was too low and unlikely to return to the Fed's target of just below 2% without additional help from the central bank.
He said the Federal Open Market Committee, the bank's rate-setting arm, was "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate."
Fed policymakers are widely expected to announce a new monetary stimulus package - dubbed QE2 - at their next meeting on November 2 and 3.
The decline in the dollar's value has stoked concerns over a so-called "currency war" in which nations compete to keep their currencies from rising in value as the dollar sags.
China has come under fire in recent weeks amid accusations that it is distorting trade by keeping its currency weak to prop up exports.
Mark O'Sullivan, director of dealing with CurrenciesDirect, said a currency war could see countries revert to "1930s style protectionism" - an economic policy of restraining trade between states through methods such as tariffs on imported goods.
He said: "Countries will be forced to take measures to protect their own currency that they wouldn't usually do - like import tariffs, which would mean moving towards protected markets, rather than free markets."
Mr O'Sullivan said the devalued dollar is also leading to a hike in the price of commodities - such as wheat, gold and oil - which could mean more expensive goods for consumers. Gold, considered to be a safe-haven for investors, hit a record of 1,386 dollars an ounce, having already risen 25% this year.
He said there had to be "a realignment of currency" because if Asian countries try to artificially weaken their currencies there will be a surplus of dollars in circulation, which will "wash up" in Europe or back in the US.
Howard Wheeldon, senior strategist at BGC Partners, said it was becoming clear that the patience of US authorities was "running out" with China, which must change its stance "if it is to avoid threats of reprisal actions".
He said: "If Chinese lawmakers fail to reverse what many regard as a long policy of currency manipulation that has already seriously disadvantaged developed economies of the West through ever worsening trade deficits and corresponding devaluation of their own currencies, there could be trouble ahead."
But Robert Fogel, Nobel laureate in economics and professor at the University of Chicago's Booth School of Business, said China was unlikely to change its position.
He said: "China, one of the most protectionist countries in the world, ignores the complaints of the Americans that together its trade and currency policies are 'beggaring' its trading partners."
He added that the global currency picture also reflected high unemployment in the US, Europe and Japan, particularly in industries reliant on exports.
He said: "It's a mark of the times - eerily like the early 1930s - when virtually every country wants a higher value for the currencies of its trading partners."Reuse content