Sterling hit its highest level against the dollar in 26 years on Monday, vaulting $2.06, as it benefited from broad dollar weakness and expectations for British interest rates to rise further this year. Sterling was bolstered last week by data showing the British economy had grown faster than expected in the second quarter.
Backing expectations for British borrowing costs to rise further from the current 5.75 percent. Data overnight from property website Rightmove showing an easing of house price inflation in England and Wales in July failed to dent the bullish sentiment built by the GDP data.
But with a lack of further British or US data on Monday, momentum was driven by lingering worries that problems in the US subprime mortgage market - catering for borrowers with poor credit histories - might spread to the wider US economy, impacting growth and hitting the dollar.
"The bottom-line is the dollar is under pressure and whenever that's the case a currency is never given the benefit of the doubt...the market is looking to push sterling higher," said Neil Mellor, currency strategist at Bank of New York.
By 1401 GMT, sterling was up 0.1 percent on the day at $2.0590, having hit a 26-year peak at $2.0603 earlier. The euro was down 0.2 percent at 67.09 pence.
Five rate hikes since last August have seen the pound benefit strongly from its higher-yielding status as a "target" currency for the carry trade, where investors borrow in low-yielding units like the yen to fund higher-return assets.
British interest rates of 5.75 percent are already the highest among Group of Seven countries and a slim majority of economists polled by Reuters expect rates to hit 6 percent by year-end.