The pound surged to a fresh 26-year high against the dollar as investors sold out of the American currency amid growing worries that the country's sub-prime mortgage woes are spreading to the wider economy.

Sterling, the euro, yen and Swiss franc have all benefited from the dollar's weakness in recent weeks — good news for UK travellers but bad news for British companies exporting goods overseas.

Sterling hit $2.0655, its highest level since 1981, and a rise of 0.2 per cent on the day. It has consistently been above the $2 mark since last month when problematic default rates among American homeowners with patchy credit ratings began to emerge.

The euro was at $1.3816, close to yesterday's all-time high of $1.3844, according to Reuters. Earlier this morning, the dollar stood 0.4 per cent lower at 120.6 yen.

"Markets remain cautious, credit remains a key focus for people. The yen is where a lot of the short positions are, and people are taking back some of these positions," Paul Robson, London-based currency strategist at RBS Global Banking, told Reuters.

Figures published later this week detailing June US housing sales are expected to provide an indicator of how much further mortgage problems have bitten.

The market will also pay close attention to adance figures on US second-quarter growth for guidance on the implications for wider economic growth in the US. The Federal Reserve also releases its "beige book" survey of US economic conditions.

In the eurozone, economists' expectations that the European Central Bank will raise rates are also spurring the value of the euro. The ECB is predicted to increase interest rates by 0.25 per cent to 4.25 per cent by the end of the year. Rates are expected to hit 4.5 per cent by the end of the first quarter 2008.

"The dollar will remain under pressure even if today's release of European July service sector PMI ... reveals some weakness," BNP currency strategists wrote in a note reported by Reuters.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive