The pound gained more than one and a half pfennigs compared with its previous close to end at DM2.5419 yesterday. Its index against a range of currencies rose by 0.3 to 92.8.
Neil MacKinnon, chief economist at Citibank, said: "Sterling is a high- yield currency in the eyes of international investors. The strength of the economy means interest rates in the UK are on an upward path."
Kenneth Clarke's statement yesterday that there was no question of sterling shadowing the euro also helped boost the pound. "Sterling is now a floating currency," the Chancellor said.
However, analysts said it was the hope that the Budget would be cautious enough to prevent another rise in interest rates that took the FTSE 100 index of share prices through the 4,000 level on Friday and climbed again yesterday. It advanced nearly 36 points to reach 4,054.6 yesterday.
Although the volume of trading, concentrated on blue-chip stocks, was not heavy, strategists said the index could easily pass its previous record of 4,073, Budget permitting. The traditional strong year-end rally was in prospect.
The financial futures markets are betting that base rates will be 7 per cent by next summer. "The stock market can live with that, but a lot depends on the nature of the Budget," Mr MacKinnon said.
If Mr Clarke is over-generous with tax cuts, the pound would rise even further but shares would fall sharply, he predicted. A net reduction in taxes of perhaps pounds 3bn would be acceptable, but pounds 5bn would not.
Bob Semple, a strategist at NatWest Markets, agreed. "Blatant electioneering by the Chancellor would hit the stock market," he said.
Even so, shares in retailers saw some of the strongest gains yesterday based on the expectation of a reduction in income tax that would boost consumer spending power next year. Marks & Spencer, Boots and Kingfisher were all higher.
Analysts said London was also catching up to other stock markets, especially Wall Street where the Dow Jones index ended up 76.03 points at a record 6,547.9, the first time it has breached the 6,500 barrier.
The rationale for yesterday's rise was a decline in housing sales during October. Although still buoyant, this suggested the US economy is expanding at a sustainable pace. Figures yesterday showed a 1.57 per cent decline to an annual rate of 3.97 million units.
A survey of 44 members by the National Association of Business Economists showed them forecasting growth in the US next year of 2.3 per cent, the same as expected this year. The economists also predicted inflation at 2.9 per cent in both years, and reduced their average forecast for interest rates.Reuse content