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NEW YORK : Sterling climbed above the psychological barrier of two dollars on Tuesday for the first time since 1992 as data on both sides of the Atlantic suggested future rate movements will hurt the greenback.
The British currency benefited from higher-than-expected British inflation data which raised expectations of an interest rate rise, while the euro was propelled by a buoyant reading of German investor confidence.
The dollar was undermined by softer-than-expected core inflation data for March which prompted renewed speculation that the Federal Reserve will cut interest rates later this year.
The pound fetched 2.0063 dollars at 2100 GMT after 1.9900 late Monday in New York.
Global Insight analyst Howard Archer commented: "We believe that sterling could well remain above two dollars for an extended period.
"In the near term, the pound is likely to be supported by expectations that UK interest rates will not only rise from 5.25 percent to 5.50 percent in May, but could also rise further thereafter."
An increase in interest rates tends to attract foreign short-term deposits, thereby increasing demand for the domestic currency and increasing its value on the foreign exchange market.
In the United States, the key rate is 5.25 percent and expected to fall, while in the eurozone it is 3.75 percent and expected to rise. In Japan, it is 0.5 percent.
"Fundamentals continue to shape a stabilising US economy, and under normal circumstances, a settling of economic volatility is encouraging," said John Kicklighter at Forex Capital Markets.
"However, with the currencies like the British pound, euro and Japanese yen looking to benefit from rate hikes in the near future, the greenback is starting to lose its appeal in the global market. Today's consumer price index played a pivotal role in this developing outlook by tempering inflation pressures and dimming spotty speculation that the Fed may pursue another rate hike in the future."
The report by the Labour Department showed that US consumer prices rose 0.6 percent in March as energy costs shot higher.
The consumer price index was below market expectations at a 0.7 percent increase. The core CPI was up a modest 0.1 percent, suggesting future price increases may be tame, some analysts said.
"It doesn't mean the Fed can begin cutting interest rates straight away but it is good news from that point of view," said Gavin Friend, forex strategist at Commerzbank.
"The Fed has been faced with a shrinking economy and rising inflation so this goes some way to squaring the circle," he added.
The euro was trading at 1.3564 dollars from 1.3535 late on Monday after earlier reaching a high of 1.3595, its highest level since December 2004.
The dollar fell to 118.90 yen from 119.72.
The euro was strong against the dollar after data showed that investor confidence in Germany rose to the highest level for 10 months in April as growth of the eurozone's biggest economy continued to gather momentum.
The ZEW economic research institute's economic expectations index, based on a poll of 320 analysts and institutional investors, rose by 10.7 points to plus 16.5 points in April, its highest level since June 2006, ZEW said in a statement.
The increase also beat expectations: analysts had been pencilling in a more modest rise to plus 10.0 points this month.
In late New York trade, the dollar stood at 1.2086 Swiss francs from 1.2141 late Monday. - AFP/de
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