Dollar hits 26-year low against pound

The pound climbed to $2.10 for the first time since 1981 this morning, boosted by speculation that China was preparing to shift its foreign reserves out of dollars.

By 10.30am, one pound was worth $2.1053. The dollar, which has been weakening for several weeks, also hit a new all-time low against the euro of $1.4703.

Analysts said today's falls had been sparked by comments made by Cheng Siwei, vice chairman of China's National People's Congress. He told a Beijing conference on Tuesday that China would "favour stronger currencies over weaker ones, and readjust accordingly".

A vice director of China's central bank, Xu Jian, was also quoted as telling the conference that the dollar was "losing its status as the world currency".

Thanks to China's booming exports, the country now holds the largest reserves of foreign currency in the world. The People's Bank of China reported last month that at the end of September, China's foreign reserves were worth $1.434 trillion.

Adam Cole of RBC Capital Markets said this morning that the comments from the two Chinese officials had "clearly been the catalyst" for the latest dollar weakness.

"However, it is more due to negative dollar sentiment generally," Mr Cole said.

The slowdown in the American economy, the sub-prime mortgage crisis and the ongoing credit crunch have all combined to weaken the US economy. Back in January, one pound was worth around $1.96.