The pound hit a seven-month high against the dollar, pushing as high as $1.2917 at one point, but shares fell.
Sterling later fell back below the $1.29 mark, reaching $1.2893. Analysts said the rise was partly due to polls putting Prime Minister Theresa May well ahead of the opposition.
The dollar also suffered from some disappointment over the lack of detail in Donald Trump's tax reform plans.
Sterling also rose against the euro, climbing 0.7% to 1.1870 euros.
On the stock market, the FTSE 100 index, which often moves inversely to the direction of the pound, closed down 51.55 points, or 0.71%, at 7,237.17.
A number of shares were trading lower after turning ex-dividend - or trading without the right to the latest dividend - including Legal & General, ITV and Informa.
Shares in private hospital group Mediclinic jumped 17.5% after the Abu Dhabi government dropped the need for a 20% co-payment for treatment at private facilities.
Last year, Mediclinic had bought Abu Dhabi private hospital group Al Noor for $1.7bn just before the government introduced the measure.
Lloyds Banking Group shares rose 2.3% as investors welcomed its first-quarter results.
Pre-tax profits at the bank doubled to £1.3bn, while its underlying profit edged up 1% to £2.1bn, beating analysts' forecasts.