Sterling rocketed to a fresh 26-year high against the US dollar yesterday by bursting through its July peak to hit $2.0694, as financial markets slashed the probability of a UK interest-rate cut next week from 25% to less than 10%.

The pound has been climbing against the dollar in recent weeks mainly because of the broader travails of the US currency, which has been hit hard by economic weakness currently peculiar to America and related expectations of further cuts in borrowing costs by the Federal Reserve.

However, even as the dollar staged a comeback yesterday morning from the record low it had hit on Monday against a basket of major currencies, it continued to fall against sterling as the pound found independent strength. This strength resulted partly from further comments from Bank of England Monetary Policy Committee member Kate Barker, suggesting she was in no rush to vote for a UK rate cut.

The pound yesterday morning burst through the 26-year peak of $2.0655 it had set in July. It closed last night at $2.0671, up from Monday's $2.0608, having touched an intra-day high of $2.0694. Barker, underlining the impression she had given in a speech last week, signalled that the recent global financial market turmoil was unlikely to be enough in itself to trigger a swift cut in UK base rates from 5.75%.

She was quoted as telling the Guernsey Press and Star: "We are asking ourselves if things are so different from August and do we actually have to cut rates."

Steve Pearson, chief currency strategist at banking group HBOS, told The Herald yesterday it was "quite possible" that sterling could climb to $2.10 in the near term.

He said: "It is only a whisker away. (It) is a couple of days' move. I think, if we were to see renewed focus on economic weakness isolated to the US and consequently easing (of interest rates) from the US (Federal Reserve), I think you could see that ($2.10)."

Pearson highlighted continued strong appetite for risk, with commodities and emerging market assets in demand, as a persistent downward influence on the dollar. He said this made it more difficult for the US to attract the capital inflows required to address the balance-of-payments situation, given America's current-account deficit, and thus forced the dollar lower.

He believed the next three to six months would be difficult for the dollar.

Pearson said dollar weakness would end at some stage and highlighted fears over inflation, with oil prices well above $90-a-barrel, as something which might ultimately reduce risk appetite and boost the US currency again.

He also noted that today's interest-rate decision by the Federal Reserve would be key to the dollar.

The Fed has already cut benchmark US interest rates, by a half-point to 4.75% on September 18, to ward off weakness in the world's largest economy stemming from massive default on home loans by those American households with poorer credit ratings served by the sub-prime mortgage sector. The sub-prime woes have spilled over into a wider American housing market slump, triggering fears over consumer spending and overall US growth.

Pearson, although not expecting the Fed to disappoint financial markets' expectations of a further quarter-point cut in the Fed funds rate to 4.5% today said: "If the Fed were not to cut interest rates, I think that would have the detrimental impact on risk appetite that I suggested would be good for the dollar."

Commenting on sterling's recent ascent against the dollar, Pearson said: "Obviously, we remain in an environment of generalised dollar weakness.

"That is a large part of the explanation why sterling-dollar is at current levels.

"More recently, in the last day or two, we have seen something of a scaling-back of interest rate cut expectations in the UK."

He added that, before yesterday morning, financial markets had been pricing in a 25% chance of a cut in UK base rates on November 8. By lunchtime, they were pricing in a probability of less than 10%.

Pearson said: "That is really what has helped sterling outperform on the day."

He noted that the pound was by lunchtime ahead against all the major currencies except the Swedish krona, which had been boosted by an interest-rate rise yesterday in this Scandinavian country.

Pearson said that the euro's failure to break through the 70.28p level of September 29 - its recent peak against sterling - had also prompted buying of the pound.

Adam Cole, senior currency strategist at Royal Bank of Canada, said of yesterday's achievement by sterling of a fresh 26-year high: "The dollar still has a generally offered tone against most currencies, but (there is) also a little bit of independent sterling strength on the basis of rate expectations, where people are taking Barker's comments overnight as a signal that interest rates (being cut) seem to be a somewhat less-pressing priority than a few weeks ago.

"The urgency seems to be diminishing. That is giving sterling a bit of a boost on its own interest-rate story."

Mulling the outlook, Cole predicted sterling could go as high as $2.08 in the short term.

He added: "Going forwards, I think the story is really dominated by dollar weakness still. We find it difficult to get independently that bullish on sterling as the interest-rate dynamic is going the wrong way.

"The next move (in UK interest rates) is down. We still see sterling gaining by default, as the dollar continues to drift lower against all the majors."