NEW YORK, Apr 5 (Reuters) The euro extended its broad-based rally on Wednesday as expectations of higher euro zone interest rates lifted it to a record high against the yen and multi-month peaks against the dollar and sterling.
The European Central Bank is widely anticipated to leave interest rates on hold at 2.5 percent at a meeting on Thursday but bank chief Jean-Claude Trichet should signal a rise in May, economists say.
Contrasted with uncertainty surrounding just how many more U.S. rate increases the Federal Reserve has left in the tank, currency dealers this week have been aggressively buying the euro and broadly shunning the dollar.
''The euro is stronger generally ahead of the ECB meeting and short rates in the U.S. are a little bit softer as well,'' said Bob Lynch, G10 currency strategist at HSBC in New York.
''On the crosses you've got euro/yen and euro/sterling higher. There is some bidding ahead of the ECB meeting tomorrow (which) has something to do with it,'' Lynch said.
By mid-morning the euro was up 0.3 percent on the day at $1.2290, according to Reuters data, having touched a new two-month high of $1.23 earlier in the U.S. session.
The euro was also up 0.4 percent against sterling at 70.12 pence, its highest since January last year, and was up at a record high against the yen of 144.45 yen.
EYES ON ISM The dollar was down 0.5 percent against the Swiss franc at 1.2839 francs, and flat against the yen at 117.54 yen.
Sterling was weaker at $1.7515, weighed down by soft U.K.
services sector data and the rise in euro/sterling.
Attention is now focused on the U.S. Institute for Supply Management's service sector index at 10:00 a.m. (1400 GMT), which is expected to have eased slightly in March to 59.0.
The dollar came under pressure earlier on Wednesday after comments by Federal Reserve officials overnight fueled speculation that the U.S. central bank's nearly two-year-long monetary tightening campaign could be approaching its end.
Kansas City Fed President Thomas Hoenig said late Tuesday that the Fed is very close to where it needs to be on policy, having raised rates at 15 straight policy meetings to the current 4.75 percent.
''Interest rate differentials on the forward curve have narrowed further on the back of relatively dovish Fed comments, withdrawing cyclical support for the dollar,'' wrote BNP Paribas currency strategists in a research note on Wednesday.
''Underlying conditions remain negative for the dollar and bullish for the euro,'' they said.
REUTERS CS BS2038