Sterling scales 26-yr peaks vs beleaguered dollar

LONDON (Reuters) - Sterling jumped to a 26-year high versus the dollar for a third day on Wednesday, vaulting $2.02 and showing no signs of vertigo so far against a broadly weak dollar that stayed near record lows versus the euro.

The greenback, dogged by troubles in the U.S. high-risk mortgage market that could hurt the wider economy, also weakened against the high-yielding Australian and New Zealand dollars.

Trade was expected to be relatively quiet, however, due to the U.S. Independence Day holiday.

Central bank decisions on interest rates are due on Thursday from Britain and the euro zone. Fifty-six of 70 economists polled by Reuters expect a 25 basis point UK rate hike to 5.75 percent, widening the gap over the Federal Reserve's 5.25 percent policy rate.

"Sterling is maintaining its leader status amongst the majors with regards to outperformance against the generally weaker dollar...We are likely to see sterling continuing to move higher ahead of the BoE meeting," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

"As far as the U.S. is concerned the dollar remains under pressure across the board. Financial markets' uncertainty is starting to increase and the spillover effects from subprime are starting to have some knock on effects on other markets."

By 1146 GMT sterling was steady at $2.0175, having hit a 26-year peak above $2.02 earlier.

The dollar edged up to 122.50 yen, holding in the 122-123 yen zone after pulling back from a 4-1/2-year high of 124.16 yen hit in June, according to Reuters data.

ECB WATCH

The euro was steady at $1.3615, off Monday's two-month peak of $1.3638, but still within sight of a record high set in April at $1.3682. It ticked up to 166.83 yen, moving back towards a record 167.19 hit on Tuesday.

The European Central Bank and its president, Jean-Claude Trichet, are seen reinforcing expectations for eventual higher rates in the euro zone on Thursday, while keeping them on hold for now at 4.0 percent.

"We could test the highs (in euro/dollar) of late April... if we get what expect from the ECB tomorrow, in the sense of a hawkish statement, there by supporting the euro," said Niels Christensen, FX strategist at Nordea in Copenhagen.

A Reuters poll of 93 analysts this week showed 84 expect an ECB hike to 4.25 percent in September, with the median forecast for rates to peak at 4.5 percent by year-end.

Data on Wednesday showed the euro zone service sector grew at its fastest pace in a year last month, although retail sales unexpectedly fell in May.

DOLLAR WOES

The dollar has been under broad pressure since last week, weighed by worries about troubles in the U.S. subprime mortgage market that forced U.S. investment bank Bear Stearns to bail out an internal hedge fund suffering big losses last month.

However, with a holiday on Wednesday and the keenly watched U.S. non-farm payrolls report on Friday, investors were reluctant to push the dollar much lower -- for now.

The Australian dollar got a boost back towards an 18-year peak versus the U.S. dollar after data showing the country's trade deficit unexpectedly shrank in May, providing some hope of rising demand for its resource-heavy exports.

Earlier, Australia's central bank kept rates on hold at 6.25 percent as widely expected, but investors reckon solid growth will lead to higher rates in the months ahead.