FOREX-U.S. dollar gains as investors pare bearish bets

* Dollar/yen climbs to near two-week high

* Dollar gains broadly, traders trim shorts ahead of Fed

* Sterling suffers after BoE report (Updates prices, adds comment, changes byline, dateline from previous LONDON)

NEW YORK, Sept 21 - The U.S. dollar firmed across the board on Monday, hitting a near two-week high against the yen, as investors scaled back massive short positions ahead of a Federal Reserve decision on interest rates this week.

The dollar rose more than 1 percent against the yen after speculative flows pushed it higher in quiet trade in Asia, where markets in Japan, Singapore and other centers were closed for holidays.

In the absence of key events or major economic data Monday, traders took profits on currencies that have rallied against the dollar, including the euro, which was up roughly 2 percent so far this month.

"The markets are consolidating and correcting ahead of the Fed decision this week," said Vasilli Serebriakov, currency strategist at Wells Fargo in New York.

The Federal Open Market Committee is expected to hold interest rates unchanged between zero and 0.25 percent on Wednesday, but traders will watch for any clues about the U.S. central bank's exit strategy from the current quantitative easing.

Analysts also said some investors were becoming concerned that short dollar positions have become overstretched, suggesting a near-term correction may be in store.

"We have also seen from the speculative positioning an increase in dollar shorts, in particular euro longs," Serebriakov said. "So it's surprising to see that outstanding short exposure is being scaled back."

Currency speculators raised short dollar positions -- essentially bets that the U.S. currency will depreciate -- last week to their highest since March 2008, according to data from the Commodity Futures Trading Commission. [ID:nN18595453]

In early New York trading, the dollar <JPY=> was up 1.3 percent at 92.41 yen, near a peak of about 92.53 yen, its highest since Sept. 9, according to Reuters charts.

Traders said there were sell orders from Japanese exporters above 92.50 yen, which has capped any dollar/yen rally until Tokyo markets reopen on Thursday.

The euro <EUR=> slipped 0.5 percent to $1.4630, easing from $1.4766 hit late last week, which was its strongest since September 2008.

Against a currency basket <.DXY>, the ICE Futures dollar index rose 0.8 percent to 77.076, its highest level since Sept. 10.

The pound hit a five-month low against the euro after the Bank of England said the pound's long-run sustainable exchange rate may have fallen due to an increased focus on Britain's economic imbalances. [nLAG003763].

The euro <EURGBP=> rose to 90.82 pence, its best level since late April.

Against the dollar <GBP=>, it was down 0.7 percent at $1.6164, near $1.6132 hit earlier in the day for its weakest level in nearly three weeks.

The dollar also benefited from waning risk appetite as the pan-European FTSEurofirst 300 index <.FTEU3> fell below the 1,000 mark on worries the market may have run ahead of economic fundamentals.

Meanwhile, investors awaited the Fed's policy decision later this week. Fed Chairman Ben Bernanke said last week the recession was "very likely" over, although he noted that any recovery would be slow.

Stronger-than-expected U.S. economic data in recent months has spurred speculation the Fed may raise interest rates from zero in the near future, but many analysts believe more time is required before such a move.

Some said dollar selling may pick up if the Fed reinforces the view that rates will stay pat for the coming months.