The pound rose to $2.0658 in European trading -- a level last seen in 1981, when Diana married Prince Charles and Margaret Thatcher was prime minister.

The British currency was powered by expectations that the Bank of England will keep its benchmark interest rate at 5.75 percent next week. The pound had finished at $2.0619 in New York late Monday.

The euro faded to $1.4405 in afternoon trading in Europe after hitting the latest in a string of all-time highs against the dollar at $1.4438 on Monday. The euro had finished at $1.4424 in New York late Monday.

The euro has been climbing steadily against the dollar, regularly touching new highs since August amid fears over the health of the U.S. economy -- worries stoked by the subprime credit crisis and disappointing economic reports.

Markets expect the U.S. Federal Reserve to cut its interest rates from their current level of 4.75 percent on Wednesday -- adding to an unexpectedly bold half-point cut last month.

Although lower interest rates can jump-start an economy, they can weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns. Higher rates can boost a currency.

The rise of the euro and the pound makes goods from the U.S. much cheaper to buy, but can hurt exports from countries that use the currencies.

In other trading, the dollar rose slightly against the Japanese currency to 114.77 yen from 114.59 yen.