Sterling managed to make back some of last week's losses as a new survey revealed good manufacturing activity.

Sterling started the day up at £1.88955 and €1.48165 after the CIPS/RBS manufacturing Purchasing Managers' Index was released.

The index rose 1.4 points above the downwardly revised August level and above many expectations.

The surprise rise in the index has fuelled speculation that the Bank of England may raise interest rates to five per cent, although it is thought the bank will not surprise the markets with a hike this week.

Sterling was also helped along by housing data showing the fastest growth in prices in two years.

In the US, the dollar suffered as Institute for Supply Management's index of service industries is expected to fall one point. A survey of leading economists by Bloomberg also predicts that this Friday's US labour department report will show a fall in job creation growth.

This has prompted some to expect the Federal Reserve to consider dropping interest rates