Consumer price inflation hit 3.1% in March, said the Office for National Statistics. The ONS said its retail price inflation rate rose to 4.8%.

Many economists consider an interest rate rise in May to be a certainty.

By late evening on Tuesday, one pound was worth $2.008, having been solidly above the $2 mark since late morning.

The stronger pound has been good news for British visitors to the US, but has made life more difficult for exporters.

Moving up

The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992.

Analysts are now betting that the Bank of England will raise interest rates when it meets in May in an effort to slow consumer spending and price growth.

For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.

Borrowing costs have been increased three times since August.

The key rate currently stands at 5.25% and is widely expected to go up to 5.5% at the Bank of England's next meeting on 10 May.

"A May move is a certainty," said Philip Shaw, economist at Investec.

"It opens up a strong possibility of interest rates rising beyond 5.5%," he added.

Higher borrowing costs act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.

Further falls

Analysts said that the outlook for sterling will also depend on US economic data due later on Tuesday.

British shoppers have been flocking to New York in recent months

David Jones from CMC Markets said, "With US economic data due later in the session, further dollar downside may be seen in due course".

It is not only sterling that is strong at the moment. The euro is at two-year high against the dollar and a record high versus the Japanese yen.

Many traders said they were surprised that last weekend's Group of Seven finance ministers meeting in Washington did not make any comments about the weakness of either the dollar or the yen.