* Softer US PPI adds to evidence of cooling inflation,

weighs on dollar

* Traders expect Fed to hold line on rates in July

* Oil near one-month high on Strait of Hormuz blockade, US

strikes

(Updates to US afternoon)

By Laura Matthews

NEW YORK, July 15 (Reuters) - The dollar fell against major

currencies on Wednesday after softer-than-expected U.S. producer

prices reinforced signs of easing inflation, bolstering the view

that the Federal Reserve can remain patient on interest rates

even as investors weighed renewed strikes on Iran.

The Producer Price Index for final demand dropped 0.3% in June

after a downwardly revised 0.6% increase in May, the Bureau of

Labor Statistics said on Wednesday. Economists polled by Reuters

had forecast the PPI unchanged after a previously reported 1.1%

advance in May.

The dollar slipped 0.2% against the yen to 161.90 yen.

The euro rose 0.51% to $1.1479, its highest since June

19. Sterling advanced 1.25% to $1.3554, its highest since

mid-May, supported by news that Andy Burnham, likely to be named

Labour party leader on Friday, will appoint a fiscally

conservative finance minister.

The U.S. dollar index, which tracks the currency against

six major peers, fell 0.55% to 100.36, its lowest since

mid-June. It fell 0.4% in the previous session, its biggest

decline in nearly two weeks, after touching its highest level

since July 2.

"The dollar's recent strength has largely been tied to

expectations of tighter U.S. monetary policy," said Steve

Kolano, chief investment officer at Integrated Partners.

"Not necessarily tighter policy itself, but rather a lower

probability of policy easing, as Fed funds futures are still

pointing to the possibility of one to two rate hikes by the end

of the year."

New York Fed President John Williams said inflation remains

"unquestionably too high" but may have peaked and should begin

easing, adding that monetary policy is well positioned to guide

it back to target.

"This PPI report adds to the evidence that inflation momentum is

cooling. Yesterday's CPI likely exaggerates the slowdown, but

broader data suggest inflation may be past its peak," said

Jeremy Schwartz, senior US economist

at Nomura. "The Fed will likely remain alert to inflation

risks, but recent data support our expectation that policy will

remain on hold."

EYES ON THE MIDDLE EAST

The latest escalation in hostilities between the U.S. and Iran

kept oil prices near one-month highs, maintaining pressure on

the inflation outlook.

The U.S. military said it had begun a new wave of strikes on

Iran at 6 a.m. ET (1000 GMT) on Wednesday, after U.S. President

Donald Trump said on Tuesday that Washington had reimposed a

naval blockade of all Iranian ports.

The dollar has tended to benefit during flare-ups in the

conflict because of its safe-haven status and the relatively

limited impact of higher energy prices on the U.S. economy

compared with some peers.

Cooler U.S. inflation had earlier weighed on the dollar. U.S.

consumer inflation slowed more than expected to 3.5% on a

year-on-year basis in June, data showed on Tuesday.

The headline consumer price index fell 0.4% month-on-month,

its first decline since April 2020, as energy prices retreated.

"The shift has taken the air out of the recent USD rally, but

the technicals haven't necessarily turned over just yet," said

Michael Boutros, senior market analyst at StoneX in New York.

"The recent escalation in the Iranian conflict has caused a

resurgence in oil and continued elevated energy prices could

dampen the material progress made on the inflation front."

New Fed Chair Kevin Warsh told the House Financial Services

Committee on Tuesday that the central bank has "no tolerance"

for persistently elevated inflation, and pledged to "do my job"

if challenged by Trump.

Traders are now pricing in about a 70% chance of a December rate

hike, down from around 80% yesterday, while a move later this

month is seen as highly unlikely, according to LSEG data.

Elsewhere, China's economic growth slowed sharply to 4.3% in

the second quarter, its weakest pace in more than three years.

The yuan briefly firmed to a one-month high as the

data reinforced expectations of further policy support.

"I see limited follow-through to the dollar's post-CPI

decline," said Elias Haddad, global head of markets strategy at

Brown Brothers Harriman in London, adding that U.S. economic

outperformance, the Fed's commitment to fight inflation and

strong foreign demand for U.S. assets should keep the greenback

supported.