Sterling turned volatile on Friday and the London market pushed higher as investors reacted to a much-anticipated speech from the US Federal Reserve.
In comments delivered at the Jackson Hole meeting of central bankers in Wyoming, US Federal Reserve chair Janet Yellen signalled that US interest rates could rise following a strong performance from the world's largest economy.
Sterling initially plunged on the back of the comments before surging more than 0.5% to touch session highs of 1.327 against the US dollar. Hours later, the currency fell about 0.13% to trade at 1.316 against the dollar.
The FTSE 100 also hit session highs of 6857 points, before closing up 21.15 points at 6838.05.
Speaking at Jackson Hole, Ms Yellen said: "In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."
Sterling's rise against the dollar marked its strongest level since the Bank of England cut its own benchmark interest rate to record lows of 0.25% earlier this month.
The pound also traded about 0.29% higher against the euro at 1.71 euro.
"The currency markets frequently live and die by the 'shoot first and ask questions later' motto," David Lamb, head of dealing a FEXCO Corporate Payments, said.
"No sooner had the Fed's chair uttered the magic words 'the case has strengthened' and trigger-happy traders were snapping up dollars in expectation of a near-immediate rate rise. But as the seconds ticked by, it became increasingly clear that a hike is inevitable, but not imminent."
Ms Yellen's comments also caused a spike in oil prices, with Brent crude rising as high as 50.56 US dollars per barrel, before settling at around 49.60 US dollars per barrel.
Across Europe, the French Cac 40 closed 0.8% higher while the German Dax finished up 0.55%.
In UK stocks, London-listed miners including Rio Tinto and Glencore rebounded following a poor performance in recent sessions, rising 78.5p to 2467.5p and 5.8p to 185p respectively.
Away from the top tier index, Restaurant Group was among the biggest risers on the FTSE 250 despite reporting a loss for the first half of the year and announcing it would shut 33 under-performing sites as part of strategic review.
It booked pre-tax losses of £22.5 million for the first half of the year as it took a hit from a £59.1 million exceptional charge linked to the store closures and writedowns.
The store closures will affect up to 1,000 jobs, although it is understood that the company will redeploy the vast majority in other outlets.
Shares were up 14.6p to 422p.
Speedy Hire was also on the rise, climbing 0.8p to 38p, after it offloaded its large mechanical plant fleet for £14.4 million to Ardent Hire in an effort to reduce its debt.
The fleet, which includes dumper trucks and excavators, generated revenues of £3.2 million and operating profits of approximately £1.9 million in the 12 months to July.
The biggest risers on the FTSE 100 Index were Rio Tinto up 78.5p at 2467.5p, Glencore up 5.8p at 185p, BHP Billiton up 33p at 1080p, and Antofagasta up 14.5p at 541.5p.
The biggest fallers on the FTSE 100 Index were AstraZeneca down 56p at 4955p, Burberry down 13p at 1320p, Shire down 52p at 4850p, and Imperial Brands down 39p at 3997p.
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