THE pound's standing in the foreign-exchange market has usually been a decent guide to the state of Britain's economy. So why is sterling stirring now? The pound has risen further against the dollar this year than the other rich-country currencies that are commonly traded beyond their respective borders (see chart). It has also gained around 11% against the euro since July, to €1.23, a level it has rarely topped since 2008. The new-found enthusiasm for sterling seems odd given the economy's troubles. Figures released last month showed that Britain's GDP fell for a second successive quarter in the three months to the end of March. An index of manufacturing published on May 1st fell to 50.5 in April, suggesting industry is barely growing (a score below 50 indicates shrinking activity). Yet a currency need only look relatively good to attract buyers. The euro zone is mired in a recession that is likely to prove deeper than Britain's. Its manufacturing index was a sickly 45.9 in April. The reading for Germany, the euro zone's mightiest economy, fell to its lowest level for almost three years. German unemployment rose by 19,000 in April, according to official figures published on May 2nd. Industry is also faltering in parts of Europe beyond the euro zone, such as Sweden. Britain's economy almost looks a picture of health by comparison. Sterling bulls can also cling to recent figures showing a revival in retail sales and a drop in the jobless rate. Few countries relish a rising currency when spending is weak and jobs are being lost, but the foreign-exchange market has concluded that Britain's policymakers are unlikely to stand in the way. “The desire for the pound to go down is not as great as it was,” reckons Kit Juckes, head of currency strategy at Société Générale. One reason is inflation, which rose in March to 3.5%. The minutes of last month's meeting of the Bank of England's monetary-policy committee revealed anxiety that inflation is not falling as quickly as hoped. Stubborn price pressures make it harder for the committee to sanction further “quantitative easing” to boost the economy.

Meanwhile other central banks are trying to weaken their currencies. The Reserve Bank of Australia cut its main interest rate by half a percentage point on May 1st, citing a “persistently high exchange rate” as a factor. A few days earlier Japan's central bank said it would print more yen to buy government bonds. And the Swiss National Bank has since September supplied as many francs as necessary to keep its currency from rising against the euro.

Tellingly, the Swiss central bank has not kept all the fruits of its currency intervention in euros. Sterling's share in Switzerland's foreign-exchange reserves doubled to 8.5% in the first quarter. This may reflect a wider shift in official reserves away from the benighted euro towards less troubled currencies. There are signs, too, that private investors are keener on sterling assets. The net flow of foreign direct investment into Britain has turned positive, according to calculations by currency analysts at HSBC of M&A deals that have been announced.

Perhaps the pound's greatest appeal is that it looks cheap against benchmarks such as purchasing-power parity (PPP), which says that exchange rates should equalise the price of a basket of goods in each country. It is one of few rich-country currencies that is close to fair value on the Big Mac index, The Economist's rough-and-ready guide to PPP, which is the exchange rate that would leave the price of a burger the same everywhere.

A sustained rally in the pound would undermine exports, the main source of growth for Britain's economy in 2009 and again last year. But the lure of higher interest rates would probably be required for investors to get behind the pound in a big way. That, in turn, would require a decisive economic recovery—something that is likely to prove elusive for quite a while.