The dollar stayed near a 26-year low against sterling and a two-month trough versus the euro on Thursday as investors awaited interest rate decisions by the European Central Bank and Bank of England later in the session.
The euro approached an all-time high against the yen on expectations that the European Central Bank President Jean-Claude Trichet will reinforce market views for higher rates even as the central bank is seen standing pat for now at 4.0 percent.
"If the ECB shows a hawkish stance, the euro may extend its rise towards its record high against the dollar," said a senior trader at a Japanese bank. Trading was subdued but expected to pick up as US financial markets reopen after being closed the previous day for the Independence Day holiday.
Many investors are looking for a ECB rate increase to 4.25 percent in September and another move before year-end to 4.5 percent, eroding the yield advantage of the Federal Reserve's target rate of 5.25 percent.
Trichet, who gives a regular press conference after the ECB's meeting on Thursday, is likely to say that the bank will "monitor closely" inflation risks to signal a rate hike in September, analysts at J.P. Morgan Chase said.
The phrase is typically used two months ahead of a rate rise, instead of the "vigilance" signal, which usually means a hike is coming the following month, the J.P. Morgan Chase analysts said. The euro drifted sideways since late London trade at $1.3615 off a two-month peak of $1.3639 but within a sight of a record high at $1.3683 hit in April.
The European single currency edged up as high as 167.15 yen on electronic trading platform EBS, crawling back towards its all-time high of 167.20 yen struck on Wednesday. The Bank of England is widely expected to lift rates by 25 basis points to 5.75 percent after a two-day meeting that ends on Thursday, and investors expect even more credit tightening later in the year.
Sterling was steady at $2.0160 after touching $2.0208 on Reuters dealing system in the previous session, its highest level since 1981. The dollar was up 0.1 percent against the yen at 122.70 yen not far from its 4-1/2-year high of 124.14 yen hit in late June.
Traders said strong global stock markets were encouraging investors to hold on to risky positions such as carry trades, in which low-yielding currencies such as the yen are borrowed to fund investments in higher-yielding currencies. Japan's Nikkei share average rose 0.4 percent and was just below a seven-year intraday peak struck in February. Stock indexes in South Korea and Hong Kong hit record highs.
The yen has suffered from Japan's 0.5 percent interest rate, the lowest among major countries, and the Bank of Japan's repeated pledge to raise rates only gradually. The high-yielding Australian dollar edged up to 105.20 yen near a 16-year high of 105.35 yen hit late June. The pound hovered just below a 15-year peak at 247.35 yen.
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