* Dollar index near two-month highs, up for third week
* Markets taking Fed hike risk more seriously
* G7 meeting seen drawing less interest with bullish yen tempered
* Sterling retreats after bullish week (New throughout after start of European trade)
By Patrick Graham
LONDON, May 20 (Reuters) - The dollar headed for a third straight week of gains on Friday, with more hints that a U.S. interest rate rise is nearing keeping it close to two-month highs after it strengthened past $1.12 per euro for the first time since March.
The Swiss franc, the largest beneficiary among currencies of the shakiness that has dominated the global economy since the 2008 financial crash, was set to close at its weakest since a dramatic revaluation in January of last year.
Britain's pound, on course for its strongest week against the euro since last October after fears about next month's vote on EU membership abated, sank half a percent in early trade. EURGBP= GBP=
Overall the mood was one of consolidation after a week of volatility driven by the changes in the UK Brexit polls and a revival of expectations for rises in U.S. rates.
"The dollar is rebounding and will remain on a stronger footing," said Lee Hardman, a strategist with Bank of Tokyo Mitsubishi in London.
"We believe they (the Federal Reserve) are going to raise rates in June or July. We had thought they would wait for the Brexit vote to be out of the way, but that looks more questionable now."
The dollar index .DXY last stood at 95.283, having been as high as 95.502 overnight - a level last seen on March 29. It was up nearly 0.8 percent this week and has risen 2.4 percent in the past three weeks.
Against the yen, the greenback was trading less than 0.1 percent off a three-week high of 110.39 JPY= hit on Thursday. It stood at $1.1214 to the euro. EUR= , having touched its lowest in over seven weeks at $1.1180.
New York Federal Reserve President William Dudley on Thursday said the U.S. economy could be strong enough to warrant a rate increase in June or July. he said that the Fed would have to "weigh up" the risks from the Brexit vote. Bank of Tokyo's Hardman said that suggested that if the chances of Brexit were as low - around 15-20 percent - as is now priced into markets, the Fed might feel comfortable hiking just days before the vote.
"The market is currently ascribing around a 60 percent chance that the U.S. Fed will hike rates by the July meeting," said Tapas Strickland, economist at National Australia Bank. "Fed officials are seemingly content with such pricing."
That all, however, leaves the bigger question of whether the dollar is capable of another rally like that which took it to within 5 cents of parity with the euro a year ago. So far, net bets on the greenback in the market point to weakness not strength; more market data is due on Friday. IMM/FX
A G7 meeting of central bankers and finance ministers kicks off on Friday in the northern Japanese city of Sendai, although the event's potential impact may have lessened thanks to the recent weakening of the yen.
The Japanese currency's surge to an 18-month high versus the dollar earlier in May had prompted threats of intervention from Tokyo. U.S. Treasury Secretary Jack Lew, on the other hand, said that he saw no "disorderly" moves in the market that warranted intervention.
"Had the yen remained strong going in to the G7 meeting, discussions would have revolved around the possibility of intervention. But the market has calmed down and the meeting is drawing less attention," said Koji Fukaya, president of FPG Securities in Tokyo.