* Dlr rebounds vs euro after change in Libor definition
* Philly Fed factory slump eases sharply in June
* Euro/Swiss franc rises on talk of intervention
* BBA to let non-London banks participate in Libor (Recasts, updates prices, adds comments, details)
By Wanfeng Zhou
NEW YORK, June 18 (Reuters) - The dollar rose against the euro on Thursday after news of a change in the definition of the London interbank offered rate raised speculation yields on U.S. investments will move higher.
The euro's failure to firmly break the key $1.40 level also prompted investors to buy back the U.S. currency, leading to a reversal in prices, analysts said.
The British Bankers' Association said on Thursday it will change its definition of Libor to allow a greater number of institutions to participate in the daily rate-fixing process. Libor rates represent the average cost at which a panel of banks believe they can borrow funds.
"The idea is that more banks participating in the Libor fixing ... will drive the Libor rate higher," said Kathy Lien, director of currency research at GFT Forex in New York. "That would mean the yield on U.S. investments will be higher, which explains part of the rally in the dollar."
Sharply higher U.S. Treasury yields also lent support to the dollar. Higher rates on U.S. investments compared to the rest of the world will make the dollar more attractive versus other currencies.
"Rates (are) really what's driving the euro/dollar today and causing it to underperform," Lien said.
Price action was choppy and traders said moves in the foreign exchange market lacked conviction, and many were waiting for the policy meeting of the Federal Reserve next week and more information on the global economy.
"We've really been stuck this week in a range and I think the market is searching for direction," said Steven Butler, head of FX trading at Scotia Capital in Toronto. "It's been see-sawing around depending on what the flavor of the day is."
In late New York trading, the euro fell 0.4 percent to $1.3885, after rising as high as $1.4001, according to Reuters data.
The dollar had earlier fallen after the Philadelphia Federal Reserve Bank said its business activity index for the U.S. Mid-Atlantic region rose sharply to minus 2.2 in June from minus 22.6 in May. That was the highest reading since September 2008 and well above economists' expectations of minus 17.
Against the yen, the dollar rose 0.9 percent 96.53 yen.
Higher-yielding, commodity currencies advanced, with the Australian dollar up 0.9 percent at US$0.7995 and the New Zealand dollar also 0.9 percent higher at US$0.6382.
SWISS FRANC IN FOCUS
The euro remained higher versus the Swiss franc amid speculation the Bank for International Settlements was buying euros on behalf of the Swiss National Bank to defend the 1.50-franc level.
The euro surged to 1.5149 francs on electronic trading platform EBS from 1.5008. It was last at 1.5099 francs, up 0.3 percent on the day.
Several traders in the United States and London said they saw bids from the BIS in the currency market for the euro and offers to sell the Swiss franc. The BIS and SNB both declined to comment.
"It looks like the BIS have been in ... it's probably fair to say it's SNB-related," a London-based trader said.
The Swiss franc's move came after the SNB held interest rates at a record low on Thursday, keeping its target rate for three-month Swiss franc Libor at zero percent to 0.75 percent with an aim to lower it to 0.25 percent. SNB Governor Jean-Pierre Roth said he would continue to stop an irrational rise in the Swiss franc.
Strategists at Danske Bank said if there were any doubts, the SNB has assured investors that it will continue to act to prevent a potential appreciation of the Swiss franc against the euro.
"We remain confident that the SNB will in fact be successful in securing a floor below EUR/CHF -- with 1.50 looking quite robust," they wrote in a note. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)