The pound hit its highest level against the dollar in two years as the US currency slumped across the world.
The dollar's tumble yesterday triggered fears that the imbalance between America's multi-trillion dollar deficits and Asia's huge surpluses was finally poised to unravel.
Some economists have warned that this could result in a global recession as Americans stop spending on imported goods due to the falling dollar fuelling a surge in their prices.
The pound was the accidental beneficiary of a titanic shift between the two behemoth currencies - the euro and the dollar. Sterling jumped as much as two cents to hit $1.9350, its highest since New Year's Eve 2004, making a two-dollar pound a distinct possibility.
The pound gained despite official figures showing that estimates of economic growth in the third quarter came close to being revised down as household spending slowed sharply.
The surge in the pound will deliver a boon to Christmas shoppers planning a seasonal trip to New York, but will hit companies that export to the US. It will also cut the cost of dollar-priced commodities such as oil, which could take the pressure off the need for another rise in interest rates. "This should help to contain UK inflation," said Stephen Lewis, chief economist at Insinger de Beaufort.
The pound gained in line with the euro, which rose more than 1 per cent to as high as $1.3109, its strongest since April 2005 and just over 5 cents away from the record high set in late 2004.
The dollar dropped 1.3 per cent against the Swiss franc, and was down 0.5 per cent to a 30-month low of 115.78 yen against the Japanese currency.
Julian Jessop, chief international economist at Capital Economics, said: "The dollar's fall was an accident waiting to happen. It is all the more significant because there is no convincing trigger."
Some traders pointed to an unexpected surge in German consumer confidence on Thursday and an academic paper by a deputy governor of the People's Bank of China warning of the heavy weighting of dollar holdings by many Asian central banks.
But Mr Jessop said neither was sufficient to trigger a run on the dollar, especially as a collapse in the greenback would not be in China's own economic interest. "The bottom line is that the US's huge current account deficit leaves the dollar vulnerable to all sorts of scare stories," Mr Jessop said.
"The fact that investors are hurting the dollar when they are positive about the economy suggests the falls will be all the larger once the markets start to anticipate persistently sluggish growth and much lower US interest rates next year."
Capital Economics is forecasting a further 7 per cent fall against the euro to $1.40 and a 17 per cent decline against the Japanese currency to 95 yen.
Analysts said yesterday's movements had been exacerbated by thin trading in New York, which had a quiet day sandwiched between the Thanksgiving holiday on Thursday and the weekend.
There has been growing speculation that the European Central Bank will continue to raise interest rates, while the US Federal Reserve will call a halt to its long-run of rate rises - and that the next move could be a cut.
In the UK, the Office for National Statistics said estimates of third-quarter GDP growth had been revised down, but not by enough to force it to cut its initial estimate of 0.7 per cent growth. Weaker manufacturing growth offset strength in the booming services.
The City is split over the need for another rate rise and the figures did little to change anyone's mind.Reuse content