FOREX-Dollar dips on hopes for Iran deal, yen near danger zone

(Updated in New York afternoon time)

* Dollar falls as Iran deal hopes rise, Treasury yields drop

* Fed minutes show growing support for possible rate hike

* Yen in focus as it nears intervention zone

By Karen Brettell

NEW YORK, May 20 (Reuters) - The U.S. dollar retreated from a six-week high on Wednesday on rising hopes that the U.S. is nearing a deal with Iran to end the war in the Middle East. U.S. President Donald Trump said negotiations with Iran were in the final stages, while warning of further attacks unless Iran agrees to a deal. That sent Treasury yields sharply lower and dented the dollar, a safe-haven investment that is correlated with yield moves.

The greenback had also been approaching technical levels that suggested some giveback was due, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

This includes seven consecutive down days for the yen against the U.S. currency, the longest stretch since October.

Concerns are growing that inflation linked to the war may become more entrenched in core consumer spending, driving expectations of higher interest rates and a more hawkish stance from central banks.

Benchmark 10-year U.S. Treasury yields reached a 16-month high on Tuesday, while 30-year yields hit their highest level since 2007.

FED RATE HIKE SUPPORT BUILDS Minutes from the Fed's April meeting on Wednesday showed a growing number of officials said the central bank should lay the groundwork for a possible rate hike, a sign that incoming Chair Kevin Warsh will inherit an increasingly hawkish crew of central bankers.

Fed funds futures traders are pricing in roughly 50% odds that the Fed will raise rates by January - a sharp reversal from before the Iran war began in late February, when markets had expected two cuts this year.

Accelerating economic growth has reinforced expectations of higher rates, while a resilient labor market has reduced the case for cuts. Trump acknowledged in an interview with Fortune magazine published on Monday that he may need to wait until the war with Iran concludes before rate cuts become feasible.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.21% to 99.10, with the euro up 0.21% at $1.1628.

Sterling strengthened 0.37% to $1.3442.

The Australian dollar, often seen as a barometer for risk sentiment, gained 0.63% versus the greenback to $0.5871.

YEN VIGIL RETURNS The dollar's recent rise has pushed the yen back toward the 160 level that prompted Japanese officials last month to launch their first currency market intervention in nearly two years.

The Japanese yen was last up 0.14% against the greenback at 158.82 per dollar.

"We're waiting for the Japanese response. We're fishing for their pain threshold," said Chandler. Tokyo stepped in to stem the yen's slide through several rounds of intervention at the end of April and in early May, sources told Reuters, though the yen's strength proved short-lived. U.S. Treasury Secretary Scott Bessent said on Tuesday he was confident that Bank of Japan Governor Kazuo Ueda would do "what he needs to do" if granted sufficient independence by Japan's government - a signal of Washington's desire for further rate hikes by the central bank.

"Intervention risk should make markets more cautious about chasing dollar/yen higher, but unless U.S. Treasury yields and the broad USD soften, official action may only temporarily slow the move rather than reverse it," said Christopher Wong, currency strategist at OCBC.

(Reporting by Karen Brettell; Additonal reporting by Ankur Banerjee and Harry Robertson, Editing by Franklin Paul, Rod Nickel)