The dollar collapsed to record lows against both the pound and the euro in Wednesday trading.

At its peak, sterling was trading for 2.0363 against the dollar, a record exchange rate for the two currencies, before it fell slightly to 2.0280 - which is still around a 26-year high.

The pound made gains as the markets reacted to negative US economy news and signs that UK inflation is outstripping Bank of England targets.

Ian Kernohan, an economist at RLAM, said sterling's rise in fortunes is more the result of weakness on the part of the dollar than anything else.

"The US consumer has remained remarkably resilient in the face of a major slowdown in the housing market over the past year, but it's a question of when rather than if this weakness in housing hits the rest of the economy," he said.

He added that he was expecting the market "to revisit the idea of a cut in US rates as the Fed seeks to stabilise the situation".

The euro reached 1.3745 in late Wednesday trading and advanced to 1.3774 in early London trading on Thursday, setting a new record for rates between the two currencies.