The dollar suffered relentless selling yesterday, helping to push sterling above $2 for the first time in almost 15 years and the euro near its all-time high.

Surprisingly high inflation in London followed by unexpectedly benign consumer price data in the US proved the main catalyst for the dollar's retreat.

The markets anticipated that lower than expected core price rises in the US would ease pressure on the Federal Reserve to raise interest rates, while a rise in British consumer price inflation to 3.1 per cent increased expectations of higher British rates.

The rise in UK inflation was so marked that it forced the Bank of England to write a letter of explanation to the Treasury for the first time in almost 10 years of monetary policy independence.

With expectations of higher interest rates across Europe and signs of muted economic expansion in the US, economists said the market reactions reflected traders seeking the highest yields on investments.

After US inflation figures showed a slowdown in core inflation, the euro rose sharply against the dollar, almost touching $1.36, its highest rate for more than two years and near its lifetime high of $1.3670 in December 2004.

Sterling surged through the $2 barrier after the UK inflation figures were published, its highest rate against the greenback since September 1992. The FTSE 100 was at one stage down 60 points on fears of more interest rate rises but it recovered to close at 6497.8, a fall of 18.4 points. The dollar also fell 0.4 per cent to 119.02 yen, down from a seven-week high.

Economists said the US inflation figures made the Federal Reserve more likely to keep interest rates on hold. Drew Matus, an economist at Lehman Brothers, said: "This gives them a little more time to wait and see and let things develop." - (Financial Times service)