$2 pound forecast as sterling breaches $1.90 level

Britons will soon be able to get two dollars to the pound for the first time in more than two decades, Kenneth Clarke, the former Chancellor of the Exchequer, said yesterday as sterling broke through the $1.90 barrier.

The pound jumped to a fresh 11-year high after a rise in inflation boosted hopes of another rise in UK interest rates in spring. It rose to $1.9083, its highest level since September 1992.

Sterling also gained from news that Vodafone has pulled out of the $38bn (£20bn) bidding war for AT&T Wireless, which would have acted as a massive dollar purchase if the UK company had won.

Mr Clarke, who was chancellor from 1993 to 1997, said the dollar would continue to tumble until the White House took action to cut the record current account and trade deficits. "I'm expecting to see us get back to a two-dollar pound," Mr Clarke said. "I don't see an end to the present process until the current account deficit of the US begins to close."

The dollar has fallen 18 per cent against the pound in the past year, and has dropped against 15 of the world's 16 major currencies in the same period. Mr Clarke said the dollar's decline was not a "terrible crisis" for the UK because it made commodities cheaper but added a steeper decline would be more serious. "My real fear for the global economy is that we could have serious disruption if the dollar starts going into freefall because the US administration are doing nothing to encourage any strengthening of the dollar," he told Bloomberg.

The financial markets have grown increasingly optimistic, while the futures markets are pricing in further rises. "Market enthusiasm rises as the prices rise and that makes us suspicious," Mark Austin, the global head of foreign exchange research at HSBC, said.

The dollar continued to fall against the euro yesterday after the testimony by Jean-Claude Trichet, the president of the European Central bank, to the EU parliament on Monday.

M. Trichet declined to either hint at intervention or complain about the strength of the euro, instead talking up the prospects for the eurozone. Yesterday the euro fell to $1.2821 from $1.2771 late on Monday.