GLOBAL MARKETS-Shares tap brakes, dollar reverses as Fed focus builds

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

* Nikkei surges as Tokyo markets reopen after Monday holiday

* European bourses take breather, euro gains strength again

* Fed seen announcing plans to unwind debt portfolio

* Crude futures steady near recent highs

* Wall Street expected to add modestly to record highs

* Sterling rises as Brexit power struggle continues

By Marc Jones

LONDON, Sept 19 (Reuters) - Record (LSE: REC.L - news) -high world stocks paused on Tuesday and the dollar dipped, as investors waited for signals from the Federal Reserve on when it will start shrinking its balance sheet and nudge up U.S. interest rates again.

Tokyo's Nikkei had surged 2 percent overnight having been closed on Monday when Wall Street and MSCI (Frankfurt: 3HM.F - news) 's 47-country All World index hit fresh all-time peaks, but elsewhere bourses seemed ready for a breather.

S&P 500 and Dow futures pointed to a fractionally higher start in New York as a small rise from London's FTSE helped Europe claw back to flat, having spent the morning in and out of the red.

The pause came after eight days of gains in the previous nine, a more than 4 percent jump in the last three weeks and as investors shifted back into the euro and government debt instead.

An early flurry of activity had seen the euro pop to a near two-year high versus the Japanese yen of 134.14 yen. The Bank of Japan also meets this week but unlike the Fed is expected to signal it will keep its stimulus at full thrust.

JP Morgan Asset Management portfolio manager Iain Stealey said markets were now fully set for the Fed, which starts a two-day meeting later in the day, to officially announce it will cut, or taper, the amount it re-invests from its $4.2 trillion crisis-era portfolio of bonds.

"They have already announced the amounts they are going to start with, $10 billion on a monthly basis and probably starting over the next month or so," Stealey said.

"What may be more important to keep an eye on is the dot-plot. We still think they will have the dots set up to expect one more hike this year, which will obviously be in December, and three next year." Markets currently price in two at most.

Elevated risk appetite in Europe meanwhile saw the gap between Portuguese and Italian 10-year government bond yields narrow to levels not seen since the start of the euro zone debt crisis of 2010-2012.

That followed a strong rally in Portuguese debt over the last two sessions, after S&P became the first major ratings agency to give the country back an investment grade rating, more than five years after it first sank into junk territory.

A fast-charging euro then hit its highest against the Swiss franc since the Swiss National Bank (LSE: 0QKG.L - news) sent markets into shock in early 2015 when, without warning, it removed a cap it had been using to control the franc.

Analysts said the franc could weaken further against the euro too as long as the United States continued to favour a diplomatic solution in the standoff with North Korea.

U.S. President Donald Trump is scheduled to speak at the United Nations General Assembly later and is expected to urge U.N. member states to increase pressure on North Korea to give up its nuclear weapon ambitions.

"Trump is erratic and there have been conflicting signals from people in his administration, but as long as the market is confident the U.S. approach is going to remain diplomatic, the movement will be away from safe havens," said Jane Foley, senior FX strategist at Rabobank in London.

RECORD RUN

The small rise in Wall Street futures came after the S&P 500 and Dow had both eked out new peaks on Monday despite some late pressure on big tech stocks.

Economic data later in the day includes the Commerce Department's report on monthly housing starts, due at 8:30 a.m. ET. It is likely to show the rate of homebuilding was little changed August.

Investors were also debating any potential market impact from a possible snap election in Japan.

Prime Minister Shinzo Abe is considering calling a poll for as early as next month to take advantage of his improved approval ratings in the wake of the North Korea crisis, and disarray in the main opposition party, according to sources.

Stefan Worrall, director of Japan equity sales at Credit Suisse in Tokyo said there has been concern growing for a while among foreign investors about the future of Abe's stimulus-focused Abenomics programme.

"If Abe is cemented in power for another few years, that would be a market-positive event," he said. "Certainty is preferred to uncertainty, when it comes to market confidence."

The Nikkei's 2 percent jump overnight took its gain to almost 30 percent since Abe took power in late 2012.

Elsewhere in Asia the mood had been more subdued. South Korean shares dipped 0.1 percent, against a backdrop of caution ahead of the Fed meeting as well as continuing tensions on the Korean peninsula.

U.S. Defense Secretary Jim Mattis hinted on Monday at new military options to help protect Seoul from an attack by North Korea. But he declined to say what kind of options he was talking about or whether they involved the use of lethal force.

The dollar index, which tracks the greenback against a basket of six major rivals, inched 0.2 percent lower to 91.889 .

Britain's sterling also started to rise again having been pushed off post-Brexit highs on Monday by Bank of England governor Mark Carney who said any upcoming UK rate hikes would be gradual and limited.

In commodity markets, metals shifted lower and oil prices steadied near last week's multi-month highs. Traders braced for a potential stockpile build-up expected later this week, limiting the prospect for further gains.

U.S. crude futures were up 19 cents at just above $50 per barrel, within sight of Thursday's nearly four-month high of $50.50. Brent crude hovered at $55.50, not far from an almost five-month high of $55.99 it had marked that day.

(Additional reporting by John Geddie in London; Editing by Catherine Evans)