* Dollar index falls to lowest since February, euro and

sterling up

* Oil prices plunge over 10% as Iran says Strait of

Hormuz is open

* Fed rate cut expectations rise

* Bank of England, Bank of Japan signal caution

(Adds new comments, byline; updates prices)

By Chuck Mikolajczak and Gertrude Chavez-Dreyfuss

NEW YORK, April 17 (Reuters) - The safe-haven U.S.

dollar dropped to multi-week lows on Friday as risk appetite

soared after Iran said the Strait of Hormuz is open, boosting

optimism that the Middle East conflict is winding down.

Iranian Foreign Minister Abbas Araqchi said in a post on X

the strait is open to all commercial vessels for the remainder

of a U.S.-brokered 10-day truce agreed between Israel and

Lebanon to halt fighting between Israel and Iran-backed

Hezbollah.

Shortly after Araqchi's statement, U.S. President Donald

Trump posted on Truth Social: "IRAN HAS JUST ANNOUNCED THAT THE

STRAIT OF IRAN IS FULLY OPEN AND READY FOR PASSAGE".

Trump told Reuters on Friday that the U.S. will work with

Iran to recover its enriched uranium and bring it back to the

United States as part of any deal.

Following the announcement, oil prices plunged, Wall Street

shares posted sharp gains and U.S. Treasuries surged, pushing

their yields lower.

In afternoon trading, the dollar index, which

measures the greenback against a basket of six currencies, fell

0.3% to 97.96 after earlier dropping to 97.632, its lowest in

seven weeks.

The index was down 0.6% on the week, set for a second

straight weekly decline. Over the past two weeks, it has fallen

about 2.1%, its largest two-week drop since late January.

"The dollar's weakness is mainly about the market unwinding

the geopolitical risk premium," said George Vessey, lead FX and

macro strategist at Convera in London.

"I don't think we are pricing in a fundamentally weaker U.S.

dollar because there are question marks around the Federal

Reserve, what's the Fed's next move is going to be after

inflation came out hotter than expected. So the economy is still

somewhat resilient so it's not going to be the start of a full

structural dollar decline."

BOJ LIKELY TO HOLD RATES THROUGH JUNE

Against the Japanese yen, the dollar slid 0.6% to

158.22 after earlier climbing to 159.86. It was on track to post

its largest weekly drop in nine weeks.

Bank of Japan Governor Kazuo Ueda steered clear of signaling

a rate hike was on the cards this month, instead pointing to low

real interest rates and robust corporate profits, reinforcing

expectations the bank will hold policy steady at least until

June.

The euro, on the other hand, was up 0.1% at $1.1789,

after earlier touching 1.1848, an eight-week peak. The single

currency was up 0.6% on the week and on course for a third

consecutive weekly rise.

Money markets on Friday scaled back bets on future European

Central Bank rate hikes, fully pricing the first move in July,

from June earlier in the session.

They now assign less than a 5% chance of a rate rise at this

month's meeting, down from 15%.

In the United States, rate futures on Friday priced in a

more than 50% chance that the Fed will lower interest rates in

December, up from 29.5% in the previous session.

In other currencies, sterling firmed 0.1% to $1.3546,

on pace for a second straight week of gains.

Bank of England Chief Economist Huw Pill criticized his

colleagues' "wait and see" messaging on holding policy steady

while the Iran war plays out, saying tackling inflation should

remain the main focus despite competing trade-offs.

The risk-sensitive Australian dollar rose 0.2% to

US$0.7178, staying near four-year highs, while the New Zealand

currency was flat at US$0.5889.

"From a markets perspective it's about the duration of the

disruption, so the swifter transit can get through (Hormuz) the

better, and markets reprice the outlook," said Nick Kennedy, a

currency strategist at Lloyds in London. "The moves are all in

the right direction."