Sterling hit a three-month high against the dollar yesterday as the greenback dipped amid expectations that US interest rates will remain at historic lows for the forseeable future.

The pound rose to more than $1.6844, its highest level since early August, before falling back slightly to $1.6747. Sterling also hit a near eight-week high against a basket of leading currencies, rising to 81.6 on the index in trading, before closing at to 81.1.

The pound was boosted last week after the Bank of England’s rate-setting committee voted to raise the Bank’s scheme of quantitative easing by £25 billion — less than the £50 billion extension some investors had been expecting.

The dollar was also hit over the weekend after leaders at the G20 meeting in Scotland failed to say anything about the relative weakness of the currency. The dollar has also been targeted as a currency ripe for “carry trade”, under which investors sell the dollar to invest in other currencies, resulting in its value being depressed on forex exchanges.

The tactic is appealing because US interest rates are so low compared with those in other countries, which means that investors can achieve a better interest rate by selling dollars and buying higher-yielding currencies elsewhere.

In a a report published on Saturday, the International Monetary Fund said: “There are indications that the dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the euro and some emerging- economy currencies.”

The euro has risen about 15 per cent against the dollar over the past nine months.

Nouriel Roubini, of New York University’s Stern School of Business, who correctly predicted the financial crisis, sounded a stark warning that investors were taking advantage of the “mother of all carry trades” and could find that it turns “ugly” when they try to get out of riskier assets and back into dollars.

Sterling also rallied against the euro yesterday, hitting a two-month high before paring gains after disappointment in the markets that Kraft had not sweetened its offer for Cadbury. The euro hit a low of 88.96p yesterday, before rising slightly to 89.52p.

Commodity prices surged on the back of the weakening dollar, with gold hitting record highs of more than $1,100 an ounce. Oil prices also surged as a tropical storm hit the Gulf of Mexico. Benchmark crude for December delivery gained 3 per cent, or $2.35, to $79.78 a barrel yesterday.

Equities rose across the board, with the FTSE 100 index of leading shares closing up 92.5 points, or 1.8 per cent, at 5,235.2. The Dow Jones industrial average gained 203.52 points, or 2.03 per cent, rising to 10,226.94, a new high for 2009..

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