But its gains were limited before a purchasing managers' survey on UK manufacturing activity at 0828 GMT that may highlight the problems facing the UK economy following recent weak retail sales and public borrowing data.
The pound was last up 0.5 percent at $1.6320, but off a peak of $1.6380 hit in Asian trade, its highest since late August 2011.
Traders said the sharp move higher was helped by low volumes in holiday-thinned trade, which exaggerated price movements. Some said the pound could struggle to revisit the day's high, barring a surprisingly strong UK PMI reading.
"It will be tough for sterling to rise back above the day's high as it seems that a lot of big key levels were taken out in quick succession, riding the wave of fiscal cliff euphoria," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.
"Given that was the high since August 2011, and the pace at which cable (sterling/dollar) retreated, I don't think it will sit particularly comfortably around there."
A deal to avert a 'fiscal cliff' in the United States bolstered appetite for currencies which typically benefit from expectations of global economic growth, including the pound.
But some analysts warned the market's optimism could be short-lived. While immediate pain like tax hikes for almost all US households was averted, spending cuts of $109 billion were only delayed for two months.
The Reuters consensus forecast is for UK manufacturing PMI in December to be unchanged at 49.1, staying below the 50 reading that separates growth from contraction.
Further indications on the health of the UK economy will come later in the week, with PMI surveys on construction and services due on Thursday and Friday.
"The move up to $1.6380 came in Asia on very little trading ... if we can get a (PMI) print over 50 we should see those highs tested again," one London-based trader said, adding that Asia opening levels around $1.6240/60 should provide support for the pound.
The euro was up 0.15 percent at 81.35 pence, recovering from a two-week low of 81.045 pence reached on Monday.
Center>Copyright Reuters, 2013