(Updates at 0840 GMT)

By Harry Robertson, Sruthi Shankar and Ankur Banerjee

LONDON/SINGAPORE, Aug 1 (Reuters) -

The dollar rallied on Thursday after falling the previous

day as central banks continued to roil currency markets, while

sterling hit a three-week low ahead of a finely poised Bank of

England decision.

The dollar index, which tracks the currency

against six peers, was up 0.29% at 104.35. It fell 0.4% the

previous day after the Federal Reserve held rates steady but

opened the door

to reducing borrowing costs in September.

Chris Turner, head of global markets at ING, said

geopolitical tensions and a slowing global economy were likely

supporting the dollar, a traditional "safe haven" for investors

at moments of stress, even with the Fed heading for rate cuts.

"The geopolitical and the macro environment elsewhere in

the world isn't actually great," he said. "Obviously we've still

got some real tensions in the Middle East, and the manufacturing

sector is seemingly in recession across large parts of Europe

and in Asia."

Hamas leader Ismail Haniyeh

was assassinated

in Tehran on Wednesday, an attack that drew threats of

revenge against Israel and fuelled fears of a wider Middle East

war.

The euro fell to a three-week low at $1.0782

and was last down 0.36% as the dollar picked up.

Investors' positioning ahead of a

possible BoE rate cut

later in the day was knocking the pound, spilling over to

other currencies and supporting the dollar, said Lee Hardman,

currency strategist at MUFG.

Japan's yen was roughly flat, with the dollar

at 149.87 yen.

The yen jumped around 1.8% the previous day after the

BOJ raised rates for a second time this year. It rallied 7.3% in

July, its strongest monthly performance since November 2022,

after starting the month rooted near 38-year lows.

Intervention by Japanese authorities to boost the

currency kicked off the move higher, combining with a narrowing

of the U.S.-Japan interest rate gap to trigger an unwind of

profitable carry trades, in which traders borrow the yen at

low rates to invest in dollar-priced assets for higher returns.

STERLING SLIDES VERSUS DOLLAR

The pound dropped 0.57% to a three-week low of

$1.2779 ahead of a knife-edge interest rate decision by the Bank

of England at 1100 GMT.

Traders think there is a roughly 62% chance the BoE

lowers rates from a 16-year high of 5.25%, according to pricing

in derivatives markets, similar to Wednesday and up from around

58% at the start of the week.

Sterling has fallen from a one-year high above $1.30 in

mid-July as investors' views on BoE rate cuts have shifted.

Fed Chair Jerome Powell on Wednesday stressed that the

central bank was also focused on keeping the labour market

healthy, adding new emphasis to Friday's U.S. jobs report for

July.

It is expected to show that employers added 175,000 jobs

during the month, a step down from 206,000 in June. Data on

weekly jobless claims is due later on Thursday.

Traders are now anticipating 72 bps of easing this year

. The Fed meeting "has bolstered market expectations

that bigger rate cuts remain likely, and will be heavily

influenced by how the economy progresses from here", said Charu

Chanana, head of currency strategy at Saxo.

In other currencies, the Australian dollar was

0.28% lower at $0.6518 after sliding 2% in July as it got caught

up in the unwinding of carry trades.