FOREX-Dollar edges up as stocks eyed, sterling falls

* Dollar edges up, led by gains vs sterling

* Merrill Lynch disappoints, eyes on Citigroup results

* Dollar sentiment still clouded by financial system woes

* Euro capped as Trichet notes risks to growth (Updates throughout, changes dateline; previous Tokyo)

By Alastair Sharp

LONDON, July 18 (Reuters) - The dollar rose against major currencies on Friday, led by a broad sell-off in sterling as traders awaited Citigroup (C.N: Quote, Profile, Research, Stock Buzz) earnings for further indications on the health of the U.S. banking sector.

The dollar had come under some selling pressure earlier in the day after Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) reported weaker than expected second quarter results.

But sterling fell sharply after the Financial Times reported that the UK Treasury is working on plans to change its fiscal rules. This could effectively give it more leeway to increase borrowing as a way of mitigating the effects of anticipated economic slowdown. See [ID:nL17632891].

The pound's fall helped support the dollar. But the focus for traders remained on equity markets and Citi's second quarter earnings after Merrill posted a quarterly loss of almost $5 billion, double what analysts were expecting and the fourth straight loss for Wall Street's third-largest investment bank [ID:nN17199614].  Continued...