The pound broke through the $1.90 barrier against the dollar yesterday as analysts said an upbeat survey on the UK's manufacturing sector would "nudge" the Bank of England to raise interest rates.
The CBI, the country's largest employers' group, said factory order books were in their rosiest state since the end of 2004 thanks to a jump in export demand.
The influx of new business had fuelled stronger expectations for output over the coming months, it said.
"It is likely to give the Bank of England a further nudge towards raising interest rates again in November," Howard Archer, chief UK economist at Global Insight, said.
Sterling rose as high as $1.9026, a rise of well over a cent against the dollar, hit a two-year high against an index of the currencies of its major trading partners, and reached a 15-month peak versus the euro.
The dollar was further undermined by figures showing that factory activity in the key mid-Atlantic region suffered its first fall for three years.
Markets are increasingly betting on a quarter-point interest rate increase in November, when the Bank prepares its new forecasts. The last increase in August also coincided with its new predictions.
On Wednesday, the Bank's own survey of businesses showed firms had imposed the largest price rises since modern records began. Separate figures showed mortgage lending was at an all-time high. And the minutes of the Bank's Monetary Policy Committee on 7 September showed it was worried that households' expectations of fresh rises in inflation would fuel a surge in wage claims.
Kamal Sharma, an analyst at Bank of America, said: "The prospect of further rate hikes is expected to keep [sterling] sentiment underpinned over the coming months."
The CBI's survey of some 650 firms this month showed that the difference between the number reporting fatter order books and those seeing a decline improved to minus 5 per cent from minus 8 per cent in August.
While negative, it was still the most upbeat result since December 2004, and much better than analysts' forecasts for a slide to minus 10 per cent.
Export orders showed a balance of minus 3 per cent after minus 6 per cent in August. The survey also showed manufacturers expected to raise output in the next three months, with that balance rising to plus 14 from plus 11 per cent.
Ian McCafferty, the CBI's chief economic adviser, played down the need for a rate rise, pointing to a decline in the number of firms expecting to raise their prices.
"Cost pressures from inputs such as energy have recently eased a little, but profit margins remain under strain," he said.
"Overall, the sector is doing better than it has for some time, but concern remains over how long this can go on."Reuse content