FOREX-Dollar retreats from two-month high as Gulf tensions ease; rate hike bets rise

* Gulf ceasefire largely holds

* Dollar strength eases, yen remains in danger zone

* U.S. CPI eyed for clues on Fed rate path (Updates to Asia afternoon)

By Jiaxing Li

HONG KONG, June 9 (Reuters) - The U.S. dollar retreated from a two-month high on Tuesday, giving up earlier gains against its peers as Middle East hostilities ebbed, but moves were limited as investors positioned for rate hikes in the U.S. and Europe. Iran and Israel halted attacks on each other on Monday after an appeal from U.S. President Donald Trump, though tensions still ran high as Tehran threatened to resume strikes if Israel continued to hit Iran-backed Hezbollah in Lebanon. Trump said he could have an "idea" for an Iran deal within a few days, and investors were hopeful. Previous efforts to reach a lasting agreement with Iran to end the more than three-month-old war have made little headway and left oil prices and the greenback elevated. The euro was 0.1% stronger at $1.1545 after hitting a two-month low in the previous session. Sterling strengthened roughly 0.2% to $1.3360 to recover from a three-week low.

The risk-sensitive Australian dollar was up 0.2% at $0.7056, and the New Zealand dollar was up 0.4% at $0.5833. The Japanese yen weakened to as low as 160.295, continuing to hover around the 160 level widely seen as a line in the sand for potential official intervention.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was down 0.1% at 99.9, after hitting the two-month high of 100.21 on Monday. Kristina Clifton, senior economist and senior currency strategist at Commonwealth Bank of Australia, said the U.S. dollar faced two-sided risks this week. A deal in the Middle East would temporarily weaken the dollar due to reversing safe-haven flows, though re-escalation risks could push the greenback higher, she said. Elsewhere, the yuan was a touch firmer at 6.7756 per dollar, after data released on Tuesday showed China's exports picked up pace in May.

CENTRAL BANKS IN FOCUS

Markets are now fully priced for a quarter-point hike to 2.25% from the European Central Bank when it meets on Thursday, and see the key rate at 2.5% or 2.75% by year-end. Investors are also keenly eyeing U.S. inflation data on Wednesday for clues to the Federal Reserve's next moves after a blowout jobs report last week ramped up bets on a rate hike this year.

Fed funds futures traders now see a 70% chance of a hike by December, according to CME FedWatch. Treasury yields remained broadly elevated on rate hike expectations, with those on the 2-year note hovering near a 15-month peak while the benchmark U.S. 10-year was firmly above 4.5%.

"Coming hot on the heels of Friday's robust non-farm payrolls report, a hotter-than-expected CPI print would undoubtedly add to mounting fears of a Fed rate hike before year-end," said Tony Sycamore, market analyst at IG.

"This scenario would provide fresh support for the U.S. dollar while putting renewed downward pressure on U.S. equities." (Reporting by Jiaxing Li in Hong Kong; Editing by Shri Navaratnam and Jamie Freed)