The pound advanced to its strongest level since 2008 versus the dollar as the fastest manufacturing growth in seven months boosted the prospects for higher interest rates that enhance a currency’s allure.

UK government bonds declined as BlackRock, the world's largest money manager, said the securities were "most vulnerable to a rise in yields."

The unexpected increase in the pace of output growth shown by today's purchasing managers' report added to signs a strengthening economy may prompt the Bank of England to consider raising borrowing costs. While analysts predict the BOE will keep rates at 0.5 per cent at a meeting next week, Governor Mark Carney has said the time to normalise them is "edging closer."

“The latest move higher in the pound has been driven by the better-than-expected PMI,” said Manuel Oliveri, a foreign- exchange strategist at Credit Agricole SA’s corporate and investment banking unit in London. “Sterling looks to have further upside from here with more room for rising rate expectations. Improving growth conditions should be reflected in rising risks to inflation.”

The pound advanced 0.3 per cent to $1.7153 at 1:36 p.m. London time after climbing to $1.7156, the highest since October 2008. The UK currency appreciated 0.3 per cent to 79.78 pence per euro as it rose versus all of its 31 major peers.

Sterling strengthened 10 per cent in the past 12 months, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, as an improving economy stoked bets the BOE would hasten an increase in borrowing costs. The euro rose 1.4 per cent, while the dollar fell 3.7 per cent. With unemployment at a five-year low, house prices soaring and the economy headed for the strongest growth of any Group of Seven nation this year, investors are betting the BOE will raise the benchmark rate from the record low set in 2009 by February.

Bloomberg