The pound surged above $2 in European trading this morning after the release of unexpectedly strong British inflation data.
The pound later traded at $2.005, last seen in September 1992, after news that British annual inflation hit 3.1% in March, the highest level since 1997 and in breach of a government-set ceiling of 3%.
The data boosted expectations that at least one more interest rate rise will be needed to curb inflation.
The Office for National Statistics said consumer prices leapt 0.5% on the month, lifting the annual rate of inflation to 3.1%. Analysts had forecast a steady reading of 2.8%.
The figures showed rising milk, petrol and furniture prices helped drive consumer prices higher last month.
Britain's central bank has a 2% target for inflation and the Bank of England governor Mervyn King will now have to write an unprecedented letter to the government explaining why inflation has climbed so high.
'Because there are long term lags between changes in interest rates and their impact on inflation, the committee will continue to look through the short-term volatility in inflation over the next year or so,' Mr King said in the letter.
In response, finance minister Gordon Brown said the government agreed with the bank's approach and would continue to support its policy committee in its forward-looking decisions.
Britain's central bank has raised interest rates three times since August in a bid to curb inflation which has been above target since last May.
Analysts were already expecting another rise to 5.5 percent next month, but Tuesday's inflation data stoked speculation that there could be further increases.
