* Short positions unwound before ECB rate decision
* Dollar index stages biggest daily rise since July. 3
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, July 20 (Reuters) - The U.S. dollar climbed for a second successive day on Thursday after falling to a 10-month low earlier this week as some investors pared bearish bets before a European Central Bank meeting that may signal a policy shift later this year.
The dollar's gain was more striking against the relatively higher yielding currencies such as the Australian dollar and the kiwi against which it has suffered heavy losses in recent weeks as investors added carry trade bets.
"The dollar has fallen quite quickly in a relatively short span of time and any signs of stabilisation in economic data might trigger a burst of short covering so it is a good time to take some profits," said Viraj Patel, an FX strategist at ING Bank in London.
Among the most important data expected in the coming week, investors will be keenly waiting for second-quarter U.S. GDP data.
The dollar's index against a basket of six major currencies stood at 95.015, up 0.3 percent, its biggest single day rise since July. 3 and moving further away from a 10-month low of 94.476 touched on Tuesday.
Morgan Stanley strategists noted that short positioning in the greenback was at its most extreme since April 2009, a factor that is also helping the dollar's bounce.
The euro was the only one bucking the trend with the single currency hovering below a 14-month high, hemmed within tight ranges before the ECB's rate decision due at 1230 GMT.
With the common currency up 3 percent over the last month and German bond yields firming in recent weeks, its rate-setters will be wary of sending hawkish signals that could risk stifling a broadening economic recovery while inflation is low.
The euro is now at $1.15135, backing off slightly from Tuesday's $1.1583, its highest level since May 2016 but still maintaining gains of 3.0 percent since ECB President Mario Draghi's Sintra speech and comfortably holding above the 1.15 line breached on Tuesday.
Draghi's June 27 comments in Sintra, Portugal, hinting at the possibility of changes to the central bank's aggressive stimulus sparked a "taper tantrum" that sent the euro and bond yields sharply higher.
While most market players expect the ECB will announce at its next meeting in September that it will start tapering its asset purchases, a move this week is not completely ruled out.
"The markets are in a wait-and-watch mode before the ECB decision though policymakers won't be very happy about the recent euro strength," said Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Saikat Chatterjee, editing by Pritha Sarkar)