FOREX-Euro gains vs dollar ahead of ECB rate decision

* Euro climbs higher after being mostly lower
* Trading light ahead of Fourth of July holiday in U.S.
* Aussie steady; RBA leaves rates on hold

NEW YORK, July 3 (Reuters) - The euro rose against the
dollar o n Tuesday in pre-U.S. holiday trade as investors
positioned for a European Central Bank policy meeting on
Th ursday.
Activity was relatively light, exacerbating price moves,
ahead of the U.S. Fourth of July holiday o n Wednesday, traders
said, with a report by one trader that buying from the Middle
East was responsible for the last tick higher.
"It's thin illiquid market conditions and the prevailing
view is that we have a more risk-on environment," said Michael
Woolfolk, senior currency strategist at BNY Mellon in New York.
"There are no technical levels and we don't see any headline
risk."
The euro was last up 0.2 percent at $1.2604, closer
to the session peak of $1.2614 than the session low of $1.2557
but well below a peak touched on F riday in the wake of an EU
summit agreement, the latest attempt to stem the ongoing crisis.
The move was not expected to be sustained, as most investors
are betting that the European Central Bank will cut its
benchmark interest rate amid poor euro zone data and doubts
about a European plan to support indebted countries.
Signs from the euro zone were generally discouraging,
keeping sentiment toward the euro bearish. The jobless rate rose
to a record in May and factory activity contracted again in
June.
That overshadowed any optimism remaining from an
announcement last week that euro zone leaders agreed that rescue
funds could be used to stabilize bond markets without forcing
countries that comply with EU budget rules to adopt extra
austerity measures or economic reforms.
Finland and the Netherlands, two of the currency bloc's most
hard-line creditor states, had already cast doubt on the
measures on Monday.
"This week's key event for the euro remains the ECB meeting
on Thursday, where expectations are for a 25 basis point cut in
the policy rate to 0.75 percent," said Eric Theoret, currency
strategist at Scotiabank in Toronto. "While a rate cut had been
discussed at the last meeting, a majority of the governing
council had voted to maintain rates. It has since been rumored
that a majority now favors easing rates."

ECB AWAITED
Lower rates reduce the attractiveness of interest-bearing
securities denominated in a particular currency and so reduce
demand for the currency to buy them.
Against the safe-haven yen, the euro was up 0.8
percent at 100.72 yen, trending closer to post-summit highs
above 101.00 yen.
Many traders expect the ECB to move on Thursday to bolster
the euro zone economy by cutting its main refinancing rate.
Jaco Rouw, fund manager at ING Investment Management in
London, said there were differing opinions as to the impact of
any rate cut, but he expects the euro to weaken given the poor
economic outlook for the currency bloc.
"One opinion is that the rate cut might boost risk sentiment
and reduce the risk premium in the euro, which could be
positive, but a lower rate in itself would be euro negative," he
said.
"In the longer term, based on economic developments, there
is still room for more monetary easing in Europe, so we would
position for a weaker euro."
Some also expect the Federal Reserve to announce a third
round of asset purchases, dubbed QE3, perhaps as soon as the
U.S. central bank's next policy meeting from July 31 to Aug. 1.
Australia's central bank held its main cash rate steady at
3.5 percent on Tuesday, to continue to gauge the effect of
back-to-back cuts.
The Australian dollar was up 0.2 percent at $1.0274,
close to a two-month high touched earlier in the session.
The U.S. dollar rose 0.5 percent and bought 79.90 yen
. Traders said dollar buying by model funds was offset to
a limited extent by selling by Asian retail accounts.