LONDON - The pound is at its best levels against the dollar since just before the Black Wednesday crisis of 1992 and markets are speculating it could break the $2 barrier.
Strong British manufacturing data and a broad dollar decline took the pound above $1.9250 on Wednesday for the first time since shortly before sterling left Europe's Exchange Rate Mechanism (ERM) on September 16, 1992.
The last time sterling rose this high against the dollar, the then Conservative government was grappling with speculators such as George Soros forcing a change of policy on the pound, and Mike Oldfield was topping album charts with his instrumental epic "Tubular Bells II".
Speculative selling of the pound forced Britain to detach itself from an artificially high peg against the deutschemark in the euro-precursor the ERM on the day dubbed Black Wednesday, a move which led to steep losses in sterling in the following months.
But sterling rose as far as $2.01 in the days preceding Black Wednesday, and the days of $2 to the pound could be here again, analysts say.
"There is no real resistance between here and $2.00 after we broke through the February high at $1.9140 today," said Elizabeth Miller, technical analyst at Redtower Research in Aberdeenshire, Scotland.
"Everyone is looking at the stronger data we have had and the currency markets are no longer pricing in UK rate cuts."
Sterling also hit four-week highs against the euro and two-month highs against a trade-weighted basket of currencies on Wednesday, rowing back from recent 11-month lows.
Hawkish comments from Bank of England Governor Mervyn King and upbeat UK data this week have shaken the market's conviction that UK rates have peaked at 4.75 percent and that the next move could be a rate cut.
Sterling has also been swept up in a wave of dollar selling, which has seen the U.S. currency fall to record lows against the euro, 12-year lows against the Canadian dollar and 16-year lows against the New Zealand dollar.
TWIN PEAKS
Worries that the United States will fail to attract sufficient investment flows to cover its huge current account deficit have hit the dollar in recent weeks, and the U.S. administration has appeared unperturbed by the dollar's slide.
The U.S. budget deficit has also hurt the dollar, but so far the UK's own twin-deficit story has failed to harm the pound. Chancellor Gordon Brown delivers his pre-budget report on Thursday.
Brown will probably be forced to raise his borrowing forecasts and analysts say taxes may have to rise after the general election if he is to keep meeting his own fiscal rules.
Brown's so-called Golden Rule is that he only borrows to invest over the course of an economic cyle.
The UK also has a trade deficit, including a deficit in oil trade for the first time in September since August 1991.
But analysts said the UK situation was small fry when compared with the United States.
"Britain's external current account deficit is much lower as a percentage of GDP and much lower in absolute terms than the U.S. so the required funding is less," said Steven Saywell, senior currency strategist at Citibank.
"The UK also has much higher interest rates than the U.S., and the market is very much influenced by yield levels."
U.S. interest rates are at two percent.
WATCH THE EURO
Analysts say sterling's rise to $2 is likely to be next year rather than this, particularly as the pound's progress is in part hostage to the general fortunes of the dollar.
Sterling is only likely to get to $2 if the euro rallies further against the greenback from current record highs above $1.3330, analysts say.
"We have not been at $2 for a very long time, but whether we get there could hinge on whether euro/dollar breaks through $1.34," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein.