The dollar skidded to lowest levels versus a currency basket since August 2008 as resurgence in risk appetite prompted investors to dump it to fund investments in riskier assets.

"In the current softer dollar environment, I think sterling will continue to move higher (against the dollar), but it will still lag other currencies," said Simon Smith, chief economist at FX Pro.

Sterling rose to $1.6487, its highest level since December 2009. Traders said trade was thin ahead of the Easter break, which was leading to exaggerated moves across currency markets.

"Although sterling is bid against the dollar, there's increasing evidence of UK retail accounts leaving stacked offers all the way up so it's going to find it hard work to find traction up here even with a strong EUR/USD," said a spot trader in London.

Technical analysts said a weekly close above resistance in the $1.6465 area would leave the path open for a potential test of the November 2009 highs around $1.6880.

The euro outpaced sterling to trade at 88.70 pence, up around 0.2 percent on the day, coming back within reach of its recent five-month high of 89.24.

The euro has been boosted as euro zone interest rates are widely expected to rise again this year after last month's 25 basis point increase. UK rates remain at record lows of 0.5 percent, with markets pushing back the timing the first hike to November.

UK retail sales data for March is due for release at 0830 GMT, anticipated to fall by 0.5 percent on the month following February's 0.8 percent drop.

Consumer confidence recovered only slightly in March, showing that higher taxes, rising food and fuel prices and an uncertain economic outlook continue to weigh on morale.

Separately, UK public finance data is also due for release. Economists expect public sector net borrowing to have stayed largely at last year's level in March.