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* BoE expected to cut rates but other steps key to weaker pound
* BOJ's Iwata offers few clear hints on policy revamp due in Sept
* Dollar index recovers further from 6-week low
By Patrick Graham
LONDON, Aug 4 (Reuters) - Sterling dipped and the dollar inched up on Thursday, with trade set to be dominated by the Bank of England's expected first interest rate cut for seven years and the question of whether it does - or will do - more to stimulate the economy.
With markets fully pricing in a quarter point reduction in UK borrowing costs, dealers say the pound would surge back towards $1.3850 if the Bank of England held fire, returning to lows it hit earlier this year in the run up to June's Brexit vote.
"It would almost be as if Brexit had not happened," said Richard Benson, co-head of portfolio investment at currency fund Millennium Global in London. "There would be a scramble."
But assuming the bank does deliver, the domination of "short" speculative bets against the pound suggests that the barrier to another sell-off is high.
Expectations that the Bank would have to move aggressively to stave off a shock to investment and growth after June's vote to leave the European Union has kept sterling within sight of 31 year lows around $1.28. But it has gained in two of the past three weeks against the dollar.
"I think a cut plus 100 billion pounds in new quantitative easing is probably the barrier (to more falls)," Benson said, although he added that Governor Mark Carney would probably be able to massage the pound lower by hinting at further steps to come at his post-decision news conference.
The pound was down 0.2 percent at $1.3296 in early trade in London. GBP= It was flat against the euro at 83.71 pence. EURGBP=
"If the MPC sounds relatively cautious with regard to future easing, we might even see a small rally in sterling against the dollar," analysts from Unicredit (MI:CRDI) said in a morning note. "Still, we believe any GBP relief will be temporary."
The dollar, driven to a six-week low after a very poor reading of U.S. second-quarter gross domestic product (GDP) last week, drew strength from a better-than-expected ADP jobs number on Wednesday.
The dollar index, which tracks the greenback against a basket of six major currencies, gained 0.1 percent to 95.565 .DXY , holding above a low of 95.003 touched earlier this week.
It was 0.2 percent stronger at 101.45 yen JPY= but 0.1 percent weaker against the euro at $1.1131. EUR=
The question after the ADP numbers is whether U.S. non-farm payrolls on Friday revive expectations for the Federal Reserve to raise interest rates later this year.
U.S. interest rate futures suggest investors now see just a 40 percent chance of a Fed rate hike by December.
Serial disappointments on further monetary easing from the Bank of Japan have helped keep the yen on course for another attack on 100 yen per dollar. The dollar's 4 percent fall since last week's BOJ meeting prompted a verbal warning from Japan's top currency diplomat on Wednesday. levels of the yen are very concerning, given the lack of action from the BOJ last week. They essentially put the onus on the fiscal side of the house," said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management in Portland, Oregon.
The BOJ also said it would conduct "a comprehensive assessment" of the economy and the effects of the central bank's policy at its next meeting in September.
BOJ Deputy Governor Kikuo Iwata on Thursday reiterated the BOJ's readiness to ease policy again if needed, but kept investors guessing on what the comprehensive policy assessment due next month would involve, saying the review is not meant to transmit a specific direction for future monetary policy.