FOREX-U.S. dollar gains as tensions simmer, rate hike outlook improves

* US dollar index hits highest since July 28 on 'risk rotation'

* Euro hits lows after Draghi decision on Jackson Hole

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh (Updates to U.S. trading, new throughout, changes dateline, previous LONDON)

NEW YORK, Aug 16 (Reuters) - The U.S. dollar rose for a third straight session on Wednesday, reaching its highest level in nearly three weeks against a basket of rival currencies, boosted by expectations for another Federal Reserve interest rate rise in 2017 and cooling geopolitical fears.

Stung last week by growing tensions between the United States and North Korea, the dollar has benefited this week from an especially strong U.S. retail sales report on Tuesday and a lull in the provocative rhetoric between U.S. President Donald Trump and North Korean leader Kim Jon Un.

"This has been a classic risk off/risk on rotation across capital markets and the dollar has been no exception," said Bill Northey, chief investment officer at the Private Client Group at U.S. Bank in Helena, Montana.

Northey said he expects the Fed to signal it will begin reducing its $4.2 trillion bond holdings in September and sees a "high probability" they will raise U.S. interest rates in December.

The Federal Reserve is due to publish the minutes of its July 26th policy meeting later Wednesday.

Fed funds futures prices show traders have increased their expectations for further rate hikes this year, with CME Group's FedWatch tool showing a 55 percent chance of at least one hike before year-end.

The dollar also benefited from a fall in the euro after sources said European Central Bank chief Mario Draghi would not use his appearance at the Federal Reserve's annual Jackson Hole conference in late August to signal policy change by the ECB.

The euro has gained 11.5 percent so far this year against the dollar and is the best performing currency in the Group of 10 group of majors with most of its gains coming in recent months on growing bets that the ECB will start unwinding its massive policy stimulus.

"In the short term we are bearish on the euro/dollar as currency markets were expecting too much out of the ECB in the near term but in the medium term we are more constructive," said Stephen Gallo, European head of FX strategy at BMO in London.

The euro fell to $1.1680, its lowest against the dollar since July 28. It had touched a 2-1/2 year high of $1.1911 earlier this month.

The single currency was last trading down 0.25 percent at $1.1704.

The dollar index, which tracks the U.S. currency against six rivals, touched its highest since July 26 at 94.145. It was last up 0.15 percent at 93.962.

(Reporting by Dion Rabouin)