* Dollar index breaks above 200-day average for first time in year
* Sterling falls as soft UK data dampens BoE rate rise expectation
* Euro at lowest since mid-January, GDP seen slowing
By Hideyuki Sano
TOKYO, May 2 (Reuters) - The dollar held near a four-month high against a basket of major currencies on Wednesday, buoyed by the outlook for a strong U.S. economy and rising yields amid signs of a slowdown elsewhere, especially in Europe.
The dollar's index ticked down 0.1 percent in Asia after having gained 1 percent in the preceding two days. It rose to as high as 92.57 on Tuesday, its firmest since Jan. 10.
The index rose above its 200-day moving average for the first time in a year, triggering a wave of short-covering.
While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the U.S. economy.
The Institute for Supply Management (ISM) survey published on Tuesday showed U.S. factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building.
Data published last month showed the Fed's favourite gauge of consumer inflation had jumped in March.
"We are seeing a roll-back of dollar selling since the start of the year. If the upcoming U.S. jobs data shows gains in wage rises, that would propel the dollar higher," said Shinichiro Kadota, senior currency strategist at Barclays Capital in Tokyo.
Investors also think U.S. President Donald Trump's tax cuts and spending plans -- acting as additional stimulus at a time of already solid economic expansion -- could further fuel inflation and prompt a faster pace of rate rises.
In contrast, expectations of rising rates are dwindling in Europe as recent economic figures suggest cooling momentum after stellar growth last year.
The British pound traded at $1.3612 after having fallen to a four-month low of $1.3588 on Tuesday on soft UK manufacturing data.
It was the latest in a run of mediocre economic data that further reduced the chances of a rate increase from the Bank of England when it meets next week.
Swap markets now indicate around a 15 percent chance of a rate increase this month, down from 90 percent in early April.
The euro hovered at $1.2005, near Tuesday's low of $1.1981, which was its lowest since mid-January.
The common currency also eased to 131.58 yen, its lowest in three weeks, and last fetched 131.75 yen.
Preliminary data at 0900 GMT is expected to show growth in the 19 country currency bloc slowing to 0.4 percent quarter-on-quarter in January-March from 0.6-0.7 percent clip in the preceding five quarters.
While that would still be hardly a bad figure, it would undermine the case for an earlier withdrawal of the European Central Bank's stimulus.
The dollar rose to as high as 109.89 yen, a three-month high on Tuesday before easing slightly in Asia on Wednesday to 109.71.
Elsewhere the Australian dollar sank to an 11-month low of $0.74725 in overnight trade and last stood at $0.7504.
There was a muted response to China's Caixin/Markit manufacturing survey, which showed the sector unexpectedly picked up in April, though export orders shrank.
The Chinese yuan dipped to its lowest level since February against the dollar as the central bank lowered its yuan midpoint to 6.3670 per dollar, the weakest level in more than three months, as the dollar strengthened broadly.
The onshore yuan fell to as low as 6.3642 per dollar .
Editing by Jacqueline Wong and Kim Coghill