U.S. dollar gains ahead of Fed; Swedish crown falls after hike

LONDON/NEW YORK, Sept 20 (Reuters) - The dollar rose on Tuesday, trading near a two-decade high, as investors held firm on expectation of another aggressive rate hike by the Federal Reserve, the centerpiece of a week packed with central bank meetings.

The Fed starts a two-day meeting on Tuesday, with rate futures traders pricing in an 81% chance of a 75 basis point hike and a 19% probability of a 100 bps of tightening.

The dollar index was on track for its fifth weekly gain in six and was last up 0.5% at 110.04 . It's not far from 110.79, a level hit earlier this month for the first time since June 2002.

"Traders and investors are taking cover, aware that the dollar is behaving like a force of nature, and unwilling to face its wrath," said Karl Schamotta, chief market strategist, at Corpay in Toronto.

"This means that - with nothing to slow it down between now and Wednesday, the greenback is likely to follow Newton's first law: an object in motion will stay in motion until acted on by an external force."

The market was also rocked on Tuesday by Sweden's central bank, which raised rates by a full percentage point. The rate hike by the Riksbank was larger than analysts had expected, causing the Swedish crown to briefly spike against the euro and dollar. read more

It failed to hold onto that strength. The euro extended recent gains, climbing to a fresh six-month top of 10.8590 crowns. The euro was last up 0.6% at 10.8643 . The dollar also climbed 0.6% to 10.8764 crowns.

"In a way, this was an attempt by the Riksbank to lift the krona, but it failed, and it's not surprising," said Francesco Pesole, currency strategist at ING.

He said the relationship between European currencies and central bank policies had been breaking down as markets increasingly traded on the energy and growth outlook for Europe instead.

Providing additional support to the dollar, the U.S. two-year Treasury yield , which is sensitive to rate policy expectations, rose as high as 3.992%, its highest since November 2007.

The euro slid 0.4% to $0.9981, after dropping as low as $0.9864 on Sept. 6 for the first time in two decades, while beaten-down sterling was down 0.2% at $1.1402.

The Bank of England will decide policy on Thursday, and investors are split over whether a 50 or 75 basis point hike is on the way. read more

The Bank of Japan also meets this week but is widely expected to keep its ultra-easy stimulus settings unchanged -- including pinning the 10-year yield near zero -- to support a fragile economic recovery.

The yen has taken a kicking due to this policy and the dollar was last up 0.4% on the Japanese currency at 143.78, continuing a week-long consolidation after climbing as high as 144.99 on Sept. 7 for the first time in 24 years.

The dollar-yen currency pair tends to track the long-term yield spread between U.S. and Japanese government bonds, and so was little affected by data that showed inflation was hot, at least by Japanese terms. read more

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Currency bid prices at 10:39 AM (1439 GMT)