Dollar near 26-year low

The dollar held near a 26-year low against the pound on Wednesday and a two-month trough versus the euro, with trade quiet around the US Independence Day holiday as investors awaited key central bank verdicts later this week.
The yen edged up after ratings agency Moody's said it may upgrade Japan's sovereign rating of A2, saying the country had reached an "inflection point" in the government's efforts to improve its massive debt.
But the yen's gains were fleeting as the Japanese currency remained dogged by its low 0.5 percent yield, the lowest among industrialised countries, and the Bank of Japan's repeated pledge to raise interest rates only gradually.
Analysts said the euro would stay the strongest of top major currencies with the European Central Bank set to keep up its inflation-fighting talk and raise rates as much as twice more this year.
"The ECB will keep a very hawkish stance even though the process of monetary normalisation is coming to an end," said Kikuko Takeda, currency strategist at Bank of Tokyo-Mitsubishi UFJ. The ECB and its president, Jean-Claude Trichet, are seen reinforcing expectations for higher rates in the euro zone from 4.0 percent on Thursday.
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. The Bank of England is widely expected to lift rates 25 basis points on Thursday to 5.75 percent after a two-day meeting, moving further above the Federal Reserve's 5.25 percent policy rate.
Market players were also keeping an eye out for any security alerts heading into the Independence Day holiday after the suspected al Qaeda bomb plot in Britain over the weekend that has spawned a manhunt reaching as far as Australia. Traders said activity would likely be limited in the run-up to the BoE and ECB decisions as US markets are closed.
The dollar was almost flat from late US trade at 122.40 yen holding in the 122-123 yen zone after pulling back from a 4-1/2-year high of 124.14 yen hit in late June. The euro drifted sideways at $1.3610 off a two-month peak of $1.3639 and not far from the record high $1.3683 hit in April. The single European currency was little changed at 166.60 yen after touching a record 167.20 yen the previous day.
Sterling climbed 0.1 percent to $2.01s week's upbeat factory data and forecasts for the monthly jobs report on Friday to show solid employment growth, which would back up expectations for the Fed to hold rates steady. "The dollar has been sold quite heavily ahead of the holiday, so we could see some short covering afterwards," said a trader at a Japanese bank.
The Australian dollar got a boost back towards an 18-year peak versus the US dollar after data showing the country's trade deficit shrank in May to A$807 million, providing some hope of rising demand for its resource-heavy exports. The Aussie rose 0.3 percent to $0.8572 after reaching an 18-year high of $0.8599 earlier in the week.
Earlier, Australia's central bank kept rates on hold at 6.25 percent as widely expected, but investors expect solid growth to lead to higher rates in the months ahead.