* Dollar/yen climbs to near two-week high
* Dollar gains broadly, traders trim shorts ahead of Fed
* Sterling falls after BoE report (Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 21 (Reuters) - The U.S. dollar climbed 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 earlier rose more than 1.0 percent against the yen after speculative flows pushed it higher but later it pared some gains. Trading in Asia was quiet as major cities 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 Vassili 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 midday New York trading, the dollar JPY=> was up 1.1 percent at 92.26 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.
POUND FALLS, FED AWAITED
The euro EUR=> slipped 0.3 percent to $1.4659, 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 to 77.108, its highest level since Sept. 10. The index was last at 76.50, up 0.6 percent on the day.
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 and last traded at 90.57 pence, up 0.1 percent. Against the dollar GBP=>, the pound was down 0.4 percent at $1.6197, not far from $1.6132, 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. U.S. stocks were also down.
Meanwhile, investors awaited the Fed's policy decision later this week, and analysts said there may be changes to the U.S. central bank's economic assessment.
Marc Chandler, head of global strategy at Brown Brothers Harriman in New York, thinks the Fed needs to upgrade its view of the U.S. economy given the recent string of evidence which suggests growth is likely in the third and fourth quarters.
Fed Chairman Ben Bernanke said last week the recession was "very likely" over, although he added that any recovery would be slow.
Chandler said the Fed is likely to temper optimism about the U.S. economy and reaffirm its commitment to low interest rates for an extended period. He added that the double-dip recession during the Great Depression and the early 1980s was partly the result of premature monetary tightening. (Additional reporting by Naomi Tajitsu in London; Editing by Kenneth Barry)