In London the pound closed 3.92 pfennigs up on the day at DM2.4953 and 3.62 cents higher at dollars 1.5362. Against a basket of other currencies it closed at 81.2 per cent of its 1985 value, the highest since 8 December.
The narrow measure of money supply M0 - which consists largely of notes and coins - rose by a seasonally adjusted 3 per cent in the year to December, according to Bank of England figures.
This was the same increase as in the year to November and lies in the top half of the Chancellor's 0- 4 per cent target range for the rest of the financial year. In the past three months M0 has grown at an annual 7 per cent.
M0 is seen as a reasonable contemporaneous indicator of consumer spending. The figures were in line with surveys showing a surge in demand for credit and rising consumer confidence.
Most economists said the increase was consistent with a revival in demand. But Robert Lind, of UBS Phillips & Drew, said there was 'a question-mark over how strong and sustainable the improvement is'. Analysts fear the surge may merely reflect sophisticated bargain-hunting.
The amount of cash circulating in the economy accelerated later in the month, with annual increases of 3.6 and 5.4 per cent in the last two weeks. This backs up anecdotal evidence of late Christmas shopping and a hectic start to new year sales.
The money supply figures encouraged British institutional investors to buy sterling. The continuation of the pound's rally in New York suggests that US investors are also buying on hopes of a British economic recovery.
The pound's surge was triggered by overnight buying in the Middle East and was also helped by profit-taking and sterling's status as a safe haven from the tensions afflicting the ERM.
The stock market took little cheer from sterling's impressive performance. The FT-SE 100 index fell by 27.9 points to 2,833.6.
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