Sterling hit its strongest level against the dollar in 14 years on Thursday as traders continued to put pressure on the beleaguered US currency.

The pound traded as high as $1.9580 against the dollar, its highest level against the greenback since its ejection from the European Exchange Rate Mechanism in September 1992.

Recent volatility on foreign exchange markets has forced economic factors into the background as short-term investors made a series of assaults on key technical levels in sterling/dollar.

Traditionally, sterling performs well in December as UK companies repatriate dollar earnings ahead of the year-end.

That move has been exaggerated this year against the dollar, which has come under severe pressure against all major currencies since late last week.

Dollar bears meanwhile, have been encouraged by a growing perception that US interest rates might have peaked and fears that global central banks were set to diversify their foreign exchange reserves away from the greenback.

However, analysts say the pound's rise cannot just be put down to dollar weakness.

The pound has been supported by expectations of a further rise in UK interest rates early next year amid increasing evidence that the Bank of England's current monetary tightening cycle has done little to cool the UK property market.

Furthermore, analysts maintain that structural factors also remain strongly positive for the pound, with robust M&A inflows and an accumulation of sterling by foreign central banks set to continue to support the currency.

Net M&A inflows reached 5.7 per cent of UK GDP in the year to the end of September, driven by foreign takeovers of UK companies such as BAA and P&O. They hit £45.6bn in the first three quarters of 2006, compared with £21.8bn in the whole of 2005, the previous record.

Meanwhile net purchases of sterling by foreign central banks have run at 2 to 3 per cent of GDP over the last four quarters.

"These inflows are well in excess of the UK current account deficit and should help to underpin sterling," said Steve Saywell, currencies analyst at Citigroup.

Analysts also argue that if investors want to short the dollar, there is less risk of political interference doing it against sterling than against the euro or the yen.

"There are so many eurozone officials and Japanese officials speaking at the foreign exchange market, but on the whole there is usually little commentary about sterling, which can make it easier to express a dollar negative view through the pound," said Paul Mackel, currency strategist at HSBC.

Source:  Financial Times