Wikipedia says, "The word dike appeared in 1710 in British newspaper stories about cross-dressing pirates Anne Bonny and Mary Read. One editorial euphemistically referred to their cross dressing with a French word, dike, which refers to men's clothing."
According to the Electric Pride website, one theory about the origin of the word "dyke" as an anti-lesbian slur suggests that "dyke" derived from the word "hermaphrodite."
GLSEN suggests the word dyke may have come from the colloquial "dike" meaning to overdress. To get "diked out" is similar to our usage of getting "decked out."