Dollar gains on cautious tone

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LONDON (Reuters) -- The dollar and the yen gained broadly Thursday as the euro and perceived higher risk currencies succumbed to profit-taking ahead of a policy decision by the European Central Bank.

Traders were wary of extending the rally in riskier assets triggered after the U.S. Federal Reserve on Wednesday kept its commitment to low borrowing costs for an "extended period", driving the safe-haven dollar lower.

The Bank of England said it would expand its quantitative easing program by £25 billion to help kick-start Britain's recession-hit economy. The BoE also left interest rates unchanged at a record low of 0.5%, as expected.

The European Central Bank was scheduled to issue a policy decision later in the day.

Beyond that, closely watched U.S. non-farm payrolls data are due on Friday and Group of 20 finance ministers meet Friday and Saturday.

"There's so much to come that it will be hard to gauge how the market feels until mid-afternoon tomorrow (after the U.S. jobs data). I think this week has the potential to dictate where markets are going to go for the rest of this year," CMC Markets analyst James Hughes said.

The dollar index, which measures the dollar's value against a basket of currencies, was up 0.2% at 75.811, pulling away from Wednesday's one-week low of 75.60.

It hit a 14-month low of 74.94 in late October and has been in a downtrend since March.

The euro was down 0.2% to $1.4843, having added more than 1% on Wednesday. Against the yen, it lost 0.7% to ¥133.88 after surging more than 1.4% in the previous session to its highest this week.

The dollar fell 0.6% against the yen to ¥90.18.

But the dollar and yen were expected to remain under longer-term pressure after the Fed's pledge on low U.S. rates.

Low interest rates should ensure the dollar remains a funding currency in carry trades -- transactions in which investors borrow in low-yielding currencies to buy higher-yielding assets.

"I see this as profit-taking and nothing else. After the Fed announcement the negative carry of the U.S. dollar versus other G-10 currencies has increased and the risks are that the euro will move back above $1.50," said Michael Klawitter, currency strategist at Commerzbank in Frankfurt.

Higher yielding currencies fell, with the Australian dollar down 0.4% at $0.7188 and the New Zealand dollar down 1.1% as a 0.5% fall in European shares encouraged investors to cut risk exposure.

Analysts were divided on whether the BoE would expand its quantitative easing policy or call a halt to it, while keeping key interest rates unchanged at a record low of 0.5%.

Sterling was down 0.4% at $1.6502 and up 0.1% against the euro at 89.91 pence but pared losses after better-than-forecast UK industrial production data.

The ECB decision was seen as more predictable, with the central bank expected to keep rates at a record low 1%, though market players would keep a close eye on the news conference for any clues on possible exit strategies.

"Ahead of the weekend's G-20 meeting we don't expect the ECB head to say anything more than the usual support for U.S. policymakers desire for a strong dollar," Calyon analyst Stuart Bennett said in a note to clients.

Later in the day, U.S. weekly jobless claims data at 8:30 a.m. ET will be watched for any clues on how the U.S. jobs market is faring before monthly non-farm payrolls on Friday.