The euro hit a record high versus the low-yielding yen on Thursday, boosted by expectations that the European Central Bank will keep interest rates on hold later in the session but pave the way for a rise in the coming months.

The dollar hit a two-month low against the euro and a basket of currencies, with selling orders triggered ahead of the ECB decision at 1145 GMT and bank president Jean-Claude Trichet's news conference at 1230 GMT.

Sterling held near the previous day's 26-year peaks versus the dollar ahead of a widely anticipated Bank of England interest rate hike to 5.75 percent at 1100 GMT.

Expectations of higher rates are boosting the euro and sterling versus the dollar and yen, with U.S. rates seen on hold all year and possibly even cut, while Japanese rates will remain the lowest in the industrialized world even if the Bank of Japan does tighten monetary policy in coming months.

People are looking to central bank meetings for more dollar weakness, said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation, adding that a hawkish ECB news conference could see the single currency test higher.

The move is part of the continuation of a (weak dollar) trend that has seen the euro establish momentum as it looks to test recent highs versus the dollar.

The euro set an all-time high of 167.30 yen according to Reuters data. At 1013 GMT, it was up 0.1 percent on the day at 167.14 yen.

The euro hit a two-month high versus the dollar at $1.3660, getting closer to the all time high above $1.3680 struck at the end of April.

The dollar fell to a 2-month low of 81.242 against a basket of currencies.

The dollar was down 0.1 percent at 122.47 yen.

Sterling steadied at $2.0160, about half a cent away from a 26-year high set the previous session.

Trading was subdued but was expected to pick up as U.S. financial markets reopen after Wednesday's Independence Day holiday.

The U.S. Institute for Supply Management's non-manufacturing index for June is due at 1400 GMT, and investors are likely to focus on the employment component ahead of Friday's non-farm payrolls release. The ADP private sector employment report is due at 1215 GMT.

Analysts say weaker than expected data could lead to further dollar weakness

The dollar continues to struggle amid generally lukewarm data flow and lack of significant clarity regarding monetary policy at a time when most of the other G10 central banks are sounding hawkish or raising their respective policy rates. The dollar could remain under pressure in this context, said Lehman Brothers in a note to clients.

YEN WEIGHED

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 set a 16-year peak at 105.39 yen, while the New Zealand dollar -- which enjoys the highest interest rates in the industrialized world at 8.0 percent -- set two-decade peaks at 96.18 yen.

Traders said strong global stock markets in Asia overnight had encouraged 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 for the sixth day, while bourses in South Korea and Hong Kong hit record highs. European shares turned lower after a strong start.