FOREX-Dollar steadies after one-day slide worries bulls

* Dollar index flat to marginally higher

* USD back below 124.00 yen, euro holds above $1.0900 (Adds sterling move, more comment)

By Patrick Graham

LONDON, July 22 (Reuters) - The dollar struggled on Wednesday after profit-taking drove its biggest decline in a month in the previous session, casting more doubt on whether it can rally further after a year of gains.

Sterling was the standout in a morning of generally muted moves on major currency markets, up almost half a percent on the latest comments from Bank of England policymakers in support of higher interest rates.

The dollar had sunk almost 1 percent in U.S. and Asian time on Tuesday, hurt by poor earnings and the lack of more impetus for a month-long surge driven by expectations the Federal Reserve will raise interest rates by December.

It was broadly unchanged against both a basket of currencies and the euro in morning trade in Europe.

"The dollar has definitely run out of steam for a moment," said Piotr Matys, a currency strategist with Rabobank in London.

"Still, the fact that the Fed is going to raise rates at some stage this year means we remain constructive. Sentiment towards the euro is weak and we think it is a sell on the rallies."

The U.S. currency gained around 25 percent against the euro and a basket of currencies between June of last year and mid-March, and more analysts still think it will rise than believe it has run its course.

But its inability to trade stronger than $1.08 per euro since April is beginning to trouble those betting on a run to parity against the single currency.

Bank of America Merrill Lynch's head of G10 FX strategy Athanasios Vamvakidis said he remained bullish on the dollar, given his expectation of a Fed rate rise in September.

"We have it at parity with the euro by the end of the year, but we do not see it going much below parity," he said. "The long-term equilibrium rate with the euro is around $1.20-1.30, so it can go below that in times of policy divergence but not by so much."

By GMT 0804, the dollar was less than 0.1 percent higher against both the euro and a basket of currencies at $1.0927 and 97.376 respectively.

Against the yen it eased 0.1 percent to 123.76 yen, down from a roughly six-week high of 124.48 yen on Tuesday.

Commodity currencies, including the Australian, New Zealand and Canadian dollar, which have been hit by the dollar's rally in the past month, were still on the back foot.

The kiwi fell 0.2 percent to $0.6616, just off six-year lows reached last week, with attention shifting to a meeting of the Reserve Bank on Thursday morning that is expected to cut official interest rates at least a quarter point.

"The tables have turned a bit on NZDUSD traders with the sudden introduction of dollar weakness," said John Hardy, head of FX Strategy at Saxo Bank. "So if the RBNZ under-delivers on the dovishness of its guidance amid further USD weakness, the risk grows dramatically of a sharp squeeze." (Editing by Larry King)