By Elizabeth Howcroft
LONDON, Aug 3 (Reuters) - The pound fell against a stronger dollar on Monday, but held steady against the euro, as investors weighed the government's strategy of local lockdowns and looked ahead to the Bank of England's policy meeting on Thursday.
July was the pound's best month versus the dollar in more than a decade, although analysts said that had more to do with the dollar's weakness than the pound's strength.
The pound reached $1.3170 - its highest in nearly five months - on Friday, benefiting from investor caution about rising COVID-19 cases in the United States and data suggesting the economic recovery there was losing momentum.
But on Monday the dollar strengthened, pushing cable down to $1.3049 at 0954 GMT, down 0.3% since New York's close GBP=D3.
Versus the euro, it was broadly flat on the day, at 90.075 pence per euro EURGBP=D3.
UK PMI data was in line with estimates, showing a pick-up in demand, orders growing for the first time in five months and optimism rising by the most in two years.
Two-thirds of British businesses say they are now "fully operational" after the coronavirus lockdown, up from half in June, according to a survey on Sunday.
Lockdown measures in parts of northern England were made stricter last week and some England-wide re-opening measures were postponed.
A "major incident" has been declared in the Manchester area of Britain, a local official said on Sunday, due to rising COVID-19 cases.
Britain has the fourth-highest coronavirus death toll in the world, according to a Reuters tally of official statements.
"In contrast to the beginning of the pandemic, the British government is now taking far tougher action to prevent the virus from spreading again at a rapid rate," Commerzbank analyst Thu Lan Nguyen wrote in a note to clients.
"The fact that the British government appears to be capable of learning is now being rewarded with a strong pound," she added.
But speculators' net short position on sterling got bigger in the week to July 28, weekly futures data showed.
Brexit, the UK's high COVID-19 death toll, and the risk of negative interest rates are all commonly cited as reasons for the market's bearishness 1096742NNET.
Investors are cautious before the Bank of England meeting on Thursday, where analysts expect the policy rate and quantitative easing program to remain unchanged.
"We still expect the BoE to express caution over the highly uncertain economic outlook given the risk of further disruption from a second COVID wave, and the risk of another hit to growth later this year when the job furlough scheme expires in the autumn," wrote MUFG currency analyst Lee Hardman.
(Reporting by Elizabeth Howcroft, editing by Larry King)
((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))
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