Sterling hit an eight-month high against the dollar today after former US Treasury Secretary Larry Summers decided to pull out of the race to be the next Federal Reserve chairman.
Summers' departure leaves Fed vice-chair Janet Yellen as the clear frontrunner to succeed Ben Bernanke, who steps down in January next year.
Yellen is seen as a bigger supporter of quantitative easing, in the week that rate-setters will decide whether to slow the Fed's $85 billion-a-month money-printing programme. The pound hit $1.5959 at one point today, the highest since January, and the FTSE 100 rose 53.33 to 6637.13.
Summers, an adviser to Barack Obama during his first term, withdrew his candidacy amid fears of a brutal Senate confirmation process as Democrats indicated they would oppose his appointment. He said a clash "would not serve the interests of ongoing economic recovery".
Fed veteran Donald Cohn is still in the running, and former Treasury Secretary Tim Geithner is still a possibility despite denying his candidancy. Capital Economics' US economist Paul Dales said: "Yellen is now the clear favourite although I'm not entirely convinced she would just get the nod. Donald Cohn has interviewed for the job and although Tim Geithner has said no, so did Mark Carney last year for the Bank of England job. When the President comes calling it is difficult to say no."
Royal Bank of Scotland economist Alberto Gallo said: "Yellen's potential appointment would be viewed by market participants as doveish since she would likely maintain the existing policy stance."