The pound rose to $1.6514 against the dollar, its highest since 27 January and just below a new high against the euro. The trade weighted-index - its value against the UK's main trading partners - hit 106.6, just off a 13-month peak.
Sterling was boosted by yesterday's survey of chartered surveyors showing that the housing market is back to its late 1980s levels and that the whole of southern England is in the grip of a boom.
The Bank of England cited the housing market as one of its reasons for raising rates earlier this month. Further indications of its strength will come with the latest figures from Nationwide tomorrow.
"There's still room for more rate hikes and that's supportive for the pound," said Sonja Helleman, a currency analyst at Paribas Capital Markets.
But other experts said that the rise in the pound would dent the manufacturing recovery and make a rate rise unnecessary. "If the pound's strength continues, this could be a factor which eventually limits the peak in base rates," said one.
Dealers will gain more clues to the path of the economy on Friday, when the CIPS survey of the manufacturing sector is published.
Meanwhile, the yen fell further against the dollar on speculation that the Bank of Japan will yield to pressure to intervene to cap its recent rise. The dollar was at 106.38 yen in early trading, compared with 106.08 late on Monday.
Speculation was growing that Bank of Japan governor Masaru Hayami and the Vice-Finance Minister, Haruhiko Kuroda, were due to announce measures to curb the yen at a joint news conference late last night.
The yen has fluctuated sharply recently after Mr Hayami made contradictory statements at the weekend. However, it emerged yesterday that the Bank of Japan was able to reassure the G7 group of nations over its yen policy.