Sterling jumped to a 26-year high versus the dollar for a third day on Wednesday, vaulting $2.02 and showing no signs of vertigo so far against a broadly weak dollar that stayed near record lows versus the euro.
The greenback, dogged by troubles in the US high-risk mortgage market that could hurt the wider economy, also weakened against the high-yielding Australian and New Zealand dollars.
Trade was expected to be relatively quiet, however, due to the US Independence Day holiday. Central bank decisions on interest rates are due on Thursday from Britain and the euro zone. Fifty six of 70 economists polled by Reuters expect a 25 basis point UK rate hike to 5.75 percent, widening the gap over the Federal Reserve's 5.25 percent policy rate.
"Sterling is maintaining its leader status amongst the majors with regards to outperformance against the generally weaker dollar...We are likely to see sterling continuing to move higher ahead of the BoE meeting," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.
"As far as the US is concerned the dollar remains under pressure across the board. Financial markets' uncertainty is starting to increase and the spill-over effects from subprime are starting to have some knock on effects on other markets."
By 1418 GMT sterling was steady at $2.0163, having hit a 26-year peak above $2.02 earlier. The dollar rose 0.2 percent to 122.62 yen, holding in the 122-123 yen zone after pulling back from a 4-1/2-year high of 124.16 yen hit in June, according to Reuters data.
The European Central Bank and its president, Jean-Claude Trichet, are seen reinforcing expectations of eventual higher rates in the euro zone on Thursday, while keeping them on hold for now at 4.0 percent. "We could test the highs (in euro/dollar) of late April... if we get what we expect from the ECB tomorrow, in the sense of a hawkish statement, thereby supporting the euro," said Niels Christensen, FX strategist at Nordea in Copenhagen.
A Reuters poll of 93 analysts this week showed 84 expected an ECB hike to 4.25 percent in September, with the median forecast being for rates to peak at 4.5 percent by the end of the year.