Dollar steady before holiday; rate meetings awaited

NEW YORK (Reuters) - The dollar rebounded on Tuesday but remained near a record low against the euro as investors eyed central bank meetings this week in Europe which could keep overseas yields climbing.

The dollar rose against a basket of six major currencies, steadying after two sessions of sharp falls. But the greenback hit another 26-year low against the British pound, which has been steadily gaining ahead of an expected rise in interest rates by the Bank of England on Thursday.

The European Central Bank also meets Thursday, and is expected to keep rates on hold, but signal further monetary tightening is ahead.

Volume dwindled in early afternoon in New York ahead of the Independence Day holiday on Wednesday, analysts said. Stock and bond markets closed earlier and will reopen on Thursday.

"The dollar had a minor rebound against the euro today but with the holiday tomorrow, investors will wait until the central bank meetings and for the payrolls data on Friday to once again commit to larger positions," said Matthew Strauss, a senior foreign exchange strategist at RBC Capital in Toronto.

At 2 p.m. (1800 GMT) in New York, the euro was down 0.15 percent at $1.3614, still in sight of a record high just above $1.3680 hit in April. The dollar was barely changed against the Japanese yen at 122.38 yen.

The dollar fared better against the Swiss franc, rising 0.4 percent to 1.2155 francs after a tame reading of Swiss consumer price inflation earlier in the session.

Sterling on Tuesday hit a 26-year high versus the dollar at $2.0197 ahead of the BoE's policy meeting on Thursday.

A quarter point rate rise by the BoE would take British rates to 5.75 percent, half a percentage point above the Federal Reserve's federal funds rate. Most analysts expect the Fed to leave interest rates on hold until late this year.

"Interest rate and growth differentials continue to conspire against the dollar," said Michael Woolfolk, senior currency strategist at Bank of New York. "We're seeing an acknowledgment this week that the ECB and Bank of England are, if they are not going to be hiking rates, at least going to be sounding warning bells about hikes."

In the thin trade ahead of the July 4 holiday the main focus on the economic front was an index of U.S. pending home sales, which slumped sharply in May to its lowest level since September 2001.

The dollar showed little reaction, but coming in tandem with another report showing a modest drop in U.S. factory orders in May, the data did strengthen a view that the economy may be struggling to regain momentum in the second quarter.

Investors will get a further handle on the state of the U.S. economy on Friday with the government's nonfarm payrolls report, the most closely watched barometer of the health of the labor market.

A solid reading could lure investors back to the dollar.

"The US dollar's weakness seems to be largely a reflection of yet another bout of speculation that the Federal Reserve might sanction a rate cut later this year after all," analysts at Brown Brothers Harriman wrote in a note to clients. "We expect this too shall pass ... again."

(Additional reporting by David McMahon)