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TOKYO, July 12 (Reuters) The dollar was little changed on Thursday after a recovery from a short-lived sell-off triggered by a flight from risky trades did little to pull the currency away from a record low against the euro and a 26-year trough versus sterling.

The yen was on the back foot, having relinquished much of its gains against high-yielding currencies in previous sessions, as traders awaited a rate decision by the Bank of Japan. The central bank was expected to hold rates at 0.5 percent later in the session.

The market caught its breath after traders bought back the dollar on Wednesday when U.S. stocks clawed back from a fall on Tuesday that had been driven by ratings agency reports that warned of ratings cuts on around $17 billion of debt related to risky mortgages.

Traders said the focus in Tokyo would be the BOJ's rate decision, which they would scrutinise for clues on whether the central bank will lift its overnight rate to 0.75 percent next month, as many in the market expect.

''The question is whether a rate rise will be proposed,'' said Hiroshi Yoshida, a trader at Shinkin Central Bank.

Such a proposal would increase the likelihood of an August hike, he said, but added that even if this boosts the yen, gains would be limited, as Japan's paltry interest rate is likely to continue lagging far behind those of other countries.

The dollar was flat at 122.35 yen having recovered from a drop to 120.99 yen on Wednesday, its lowest level in a month.

The euro was little changed at $1.3745 hovering within reach of a record-high $1.3787 hit in the previous session.

Against the yen, the single currency was at 168.10 yen near a record high of 168.55 yen touched at the beginning of the week.

Sterling was at $2.0310 after hitting a 26-year high of $2.0363 on Wednesday.

The low-yielding yen hovered near its lowest level in as much as 20 years against high-yielding currencies like the Australian and New Zealand dollars after a short-covering rally on Wednesday quickly lost steam.

Traders said the yen's rebound on the back of a momentary souring in risky trades this week had been a blip in the overall trend of using the yen to buy assets in currencies that offer higher yields, known as the carry trade.

REUTERS PDS BST0728