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TOKYO, July 4 (Reuters) 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 in the week.

The Bank of England is widely expected to lift rates on Thursday by 25 basis points to 5.75 percent after a two-day meeting, taking them further above the Fed's 5.25 percent policy rate.

The European Central Bank and its President Jean-Claude Trichet are seen reinforcing expectations for higher rates in the euro zone from 4.0 percent on Thursday as well, with the next move seen most likely in September.

''President Trichet's press conference will serve as a signalling platform for markets to discern the bank's next move,'' said currency strategists at Morgan Stanley in a note to clients, adding that any mention of ''strong vigilance'' would be a gesture towards a move in August.

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.

The dollar slid earlier in the week on the worries about security and the ongoing troubles in the U.S. subprime mortgage market that forced U.S. investment bank Bear Stearns to bail out an internal hedge fund suffering big losses last month.

Traders expected activity to be limited in the run-up to the BoE and ECB decisions on Thursday as U.S. financial markets are closed for the holiday.

The dollar edged up to 122.47 yen from near 122.40 in late U.S. trade, holding in the 122 yen to 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 $1.3604 off a two-month peak of $1.3639 and not far from a record high of $1.3683 stru The dollar's fall against the yen has been more limited as investors dump the low-yielding Japanese currency for higher-yielding currencies in the carry trade, while Japan's low yields prompt domestic households to pour more funds into foreign assets.

Bank of Japan officials have repeated this week the central bank intends to raise rates at a gradual pace, which would keep the yen by far the lowest-yielding of major currencies even as the BOJ is seen likely to raise rates in August to 0.75 percent.

REUTERS DKS RAI0700