* Dollar marks time before U.S. Fed rate decision
* Graphic: Peripheral bond yields: http://reut.rs/2eHvHPE
* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh
LONDON, July 26 (Reuters) - The Swiss franc tumbled to its lowest levels against the euro in 18 months on Wednesday as some investors sold the currency, noting the euro's recent strength against other major rivals.
The franc weakened 0.6 percent to 1.1154 per euro, its lowest since February 2016. It is on track for its biggest two-day losing streak since April this year, down more than 1 percent.
The franc also weakened 0.7 percent to 0.958 per dollar.
"The euro has gained against some other currencies in recent days and only the franc has lagged that move to some extent and it is now playing catch-up with some large clips going through," said the head of FX hedge fund sales at a bank in London.
The euro has gained more than 6 percent against the Japanese yen over the last month.
Traders also cited a recent tightening of peripheral bond yields as contributing to the recent weakness in the franc.
Spreads between 10-year Italian and German bond yields have shrunk by nearly 50 basis points over the last two month to around 150 basis points as currency market volatility has eased considerably.
Investors tend to use the franc as a funding currency to buy relatively higher yielding debt.
Elsewhere, the dollar edged higher on Wednesday, rising from a 13-month low touched in the previous session as investors trimmed some short bets before a Federal Reserve policy decision.
Markets have reduced expectations for a U.S. interest rate rise in the coming months to one at less than 50 percent before the end of the year, according to Reuters polls and CME's Fedwatch tool.
"If there is no change in the language of the statement, we can expect a mild dollar rally and there would be a better opportunity for the Fed to communicate its policy expectations at Jackson Hole next month," Commerzbank currency strategist Ulrich Leuchtmann said.
The dollar edged up 0.1 percent to 94.10 against a trade-weighted basket of its rivals. It fell to a 13-month low of 93.638 on Tuesday.
The U.S. central bank will issue its decision following the end of a two-day policy meeting at 1800 GMT. Economists expect the Fed's benchmark lending rate to remain in a target range of 1.00 percent to 1.25 percent.
The euro was broadly flat at 1.1642. On Tuesday, it rose as high as $1.17125, its highest since August 2015, and just a hair below a 2-1/2-year peak, boosted by a stronger-than-expected German business survey.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s
(Editing by Mark Heinrich)