April 17 (Bloomberg) -- The pound leapt above $2 for the first time in 15 years as a U.K. report showed inflation unexpectedly quickened, prompting traders to bet the Bank of England will raise interest rates twice more this year.

The U.K. pound reached the strongest since September 1992, when billionaire investor George Soros led speculators to drive the currency out of the European system of linked exchange rates. Britain's economy, Europe's second-biggest, has shown few signs of cooling after three rate increases since early August. Another quarter-point move would take borrowing costs to 5.5 percent, the highest among the Group of Seven major economies.

``The sky's the limit for sterling,'' Simon Derrick, chief currency strategist at Bank of New York, said in London. ``It's a favorite for investors because of the rate differential.''

The pound rallied to as high as $2.0075, and was trading at $2.0060 as of 4:46 p.m. in London, from $1.9897 late yesterday. Against the euro, the pound strengthened to 67.67 cents, from 68.02. It reached 238.54 yen, the highest since the end of January, from 238.26 yesterday.

Consumer-price inflation accelerated to 3.1 percent in March, the highest in a decade, the government said today. The increase forced Bank of England Governor Mervyn King to write a letter of explanation to Chancellor Gordon Brown for the first time since the central bank was granted independence in 1997.

The bank must ensure price expectations are ``anchored'' on its target rate of 2 percent, King wrote. The letter is required when inflation is more than a percentage point away from the bank's 2 percent target.

Bonds, Futures

Bond prices slumped the most in a month, pushing yields on benchmark two-year government debt up 4 basis points to 5.51 percent. Futures traders also added to bets on higher rates, with the contracts now showing they fully expect two more quarter-point increases this year.

The pound has risen 3.1 percent versus the dollar since the BOE last raised its key Bank Rate, to 5.25 percent, on Jan. 11. The currency is being buoyed by the so-called carry trade, where investors buy U.K. assets by borrowing in lower-yielding currencies such as the yen.

For consumers, the pound's ascent is an incentive to make shopping trips to the U.S., where an iPod music player now costs about a third less than in the U.K.

``The $2 pound triggers a desire to seek a bargain and that's what our travelers are doing,'' said Paul Charles, Communications Director at Virgin Atlantic Airways, the U.K. carrier controlled by billionaire Richard Branson. Virgin said Easter bookings to the U.S. rose 15 percent from a year earlier.

Competitiveness

The currency's appreciation may damp manufacturing growth by making U.K. goods costlier in nations including the U.S., the world's biggest economy. Exports were the lowest in a year and a half in February. About a tenth of U.K. exports go to the U.S.

``No country wants to see its currency become too strong and so lose competitiveness,'' said Quincy Krosby, chief investment strategist at The Hartford, which oversees $325 billion in Hartford, Connecticut. ``Experts will start to complain about the strength of the pound.''

The cooling effect of the pound's gain on the economy may be limited because manufacturing has shrunk as a proportion of total gross domestic product to about 14 percent. Services make up almost three-quarters of the U.K. economy.

Hanson Plc

Hanson Plc, the world's largest maker of aggregates, said the exchange-rate effect on its profit is limited because it makes building materials for U.S. customers inside the country.

Currency losses on repatriated earnings are partly offset by reduced interest costs because most of Hanson's debt is denominated in dollars, said spokesman Nick Swift.

``Sterling is going to keep on rising,'' said Steven Bell, who manages GLC Ltd.'s so-called global macro hedge fund. ``We have very high interest rates here in the U.K. and an attractive macro background. I think $2.10 is the level that the pound will settle at.''

Higher rates on sterling-denominated assets prompted central banks to increase the amount of the U.K. currency in their reserves last year. The pound surpassed the yen as the world's third most-popular reserve currency, behind only the dollar and the euro, as central banks sought higher yields.

They increased their holdings of pounds to the equivalent of $135 billion, or 4.3 percent of total reserves at the end of September, the most since at least 1999, International Monetary Fund data showed. Italy, Norway, Poland, Oman and Ukraine were among those buying the currency.

``The pound has been the darling of central banks over the last couple of years,'' said James McCormick, head of global currency research at Lehman Brothers Holdings Inc. in London.

Investors' Bets

Investors expect the Bank of England to raise its benchmark rate two quarter points this year. The implied yield on the September 2007 interest-rate futures contract jumped 7 basis points today to 5.92 percent.

The contracts settle to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the benchmark rate for the past decade.

The pound's gain today took it to its highest since before the U.K. was forced to leave a system of pegging its currency to those of other European Union members. Withdrawal from the so- called ERM in 1992 caused the pound to tumble against the deutsche mark, then Germany's currency, as well as the dollar.

To contact the reporter on this story: Aaron Pan in London at apan8@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: April 17, 2007 11:55 EDT