Sterling leaps to 30-month high against euro

If you own a gite in Brittany, a villa in the Algarve or a farmhouse in Tuscany, you will probably have been delighted to see the pound's surge against the euro, bringing with it the promise of cheaper holidays on the Continent.

In a broad-based rally against all major currencies, sterling hit €1.5254 yesterday, a level not seen for two and a half years. It has jumped by 2.8 per cent in the first three weeks of this year alone. Against the dollar, it has edged down from December's peak of $1.9847, its highest since it was unceremoniously dumped from the European exchange rate mechanism in 1992, but is expected to breach $2 within weeks.

The pound climbed steadily throughout 2006, but last week's shock interest rate rise by the Bank of England gave it a further boost. "Sterling was looking relatively strong anyway, but the real leg-up came from the rate hike," said Chris Furness, currency analyst at 4Cast.

Interest rates are crucial. When they rise, they support a currency by making returns on deposits more attractive to foreign investors. But when they fall, investors may choose to put their cash elsewhere.

Mr Furness pointed out that while sterling looked strong against the euro, it was currently trading at 10p to the French franc in "old money". "The two-bob franc was regarded as the right exchange rate in the days before the single currency," he said.

While good news for Britons holidaying in Europe, the pound's rapid ascent could damage the manufacturing sector. Some 55 per cent of Britain's exports go to the eurozone, and a stronger pound will make them more expensive, hitting demand.