FOREX-Dollar drifts higher in holiday-thinned trade, RBA in focus

* Euro and sterling stay soft, dollar benefits

* Aussie becalmed ahead of RBA rate decision

* RBA seen lowering cash rate by 25 bps to 2.0 pct

By Ian Chua

SYDNEY, May 5 (Reuters) - The dollar was slightly firmer against a basket of major currencies early on Tuesday, advancing against the euro and sterling in thin trade with several key financial centres shut for holidays.

The euro last traded at $1.1146, continuing to peel away from a two-month peak of $1.1290 set on Friday. It also lost a bit of ground against the yen, slipping to 133.96 , from Friday's two-month high of 135.29.

Sterling stayed on the defensive just days before Britons vote in the closest-fought electoral race in recent history.

It bought $1.5116, not far from a one-week low of $1.5091 set overnight. It has fallen more than 2 percent in the past few sessions.

"Political uncertainty is set to remain high after the election," analysts at JPMorgan (LSE: JPIU.L - news) wrote in a note to clients.

"We believe it could possibly take four weeks to form a government rather than the one week it took in 2010, and view GBP as too expensive for the election and re-enter EUR/GBP longs."

With the euro and sterling on the backfoot, the dollar index edged up to a high of 95.637, pulling further away from a two-month trough of 94.399 plumbed on Thursday.

Dollar bulls have been feeling the chill lately as a sharp slowdown in the U.S. economy over the first quarter has markets questioning whether the Federal Reserve will hike interest rates this year.

Chicago Fed President Charles Evans on Monday provided no clarity on the issue. He said rate hikes could begin this year, although with inflation uncomfortably low and the unemployment rate still too high, the Fed should hold off on raising rates until early next year.

While the Fed is contemplating tightening, Australia's central bank in contrast is seen likely to cut rates on Tuesday.

Debt markets imply a three-in-four chance of a quarter point cut to the 2.25 percent cash rate to a new record low at Tuesday's policy review.

The Australian dollar held steady near $0.7850, having already fallen from above 80 cents in recent sessions.

"The RBA has expressed a preference for AUD to trade closer to 0.75, so it is unlikely to look favourably upon recent strength above 0.80. For this reason, cut or not, we continue to expect weakness in AUD," said CitiFX Strategy.

Japanese financial markets remain shut for the Golden Week holidays and trading there will resume on Thursday. (Editing by Richard Pullin)