(Updates to Asia afternoon)

* Dollar up more than 1% this week, sharpest increase

since early March

* Trump-Xi summit enters second day; Trump says losing

patience with Iran

* Yen struggles at 158 level; sterling weighed down by UK

political turmoil

By Rae Wee

SINGAPORE, May 15 (Reuters) - The dollar rode U.S.

Treasury yields higher on Friday and was set for its biggest

weekly gain in more than two months, as mounting inflationary

pressures from higher energy prices fuelled bets of a Federal

Reserve rate hike this year.

Markets were also keeping a close eye on the second day of a

summit between U.S. President Donald Trump and his Chinese

counterpart Xi Jinping, with Trump seeking economic wins from

Beijing against the backdrop of the Middle East war.

Trump said his patience with Iran was running out, and that

he and Xi do not want Iran to have nuclear weapons and "want the

straits open".

Market reaction to the talks has so far been muted as investors

await more details. The onshore yuan retreated from

its highest level against the dollar in more than three years

due to broad dollar strength and was last at 6.7953 per dollar.

Its offshore counterpart dipped 0.14% to 6.7961.

"The meeting is broadly in line with market expectations and

slightly constructive at the margin," said Cliff Zhao, chief

economist at CCB International.

"A better tone is helpful, but markets will still look for

more clarity on trade, business access and specific policy

arrangements."

In the broader market, the dollar rose as U.S. Treasury yields

scaled 11-month highson growing bets of a Fed hike this year.

Against the greenback, the euro fell to a one-month

low and last traded 0.15% lower at $1.1651. The common currency

was set to lose about 1.1% for the week.

The yen struggled on the weaker side of 158 per

dollar despite domestic data pointing to a spike in wholesale

inflation, bolstering the case for the Bank of Japan to raise

interest rates as soon as June.

The dollar index meanwhile rose to a one-month top

and was on track for a weekly gain of roughly 1.2%, capping off

its sharpest increase since early March.

BETTING ON FED HIKES

The dollar rally has been gathering pace all week, on evidence

that while domestic inflation is mounting the U.S. economy

remains resilient despite the ongoing Middle East conflict.

Data on Thursday showed U.S. retail sales increased further in

April while weekly initial jobless claims figures pointed to

stability in the labour market.

Investors are now pricing in just under a 40% chance that the

Fed could raise rates in December, compared with a 22.5% chance

a week ago, according to the CME FedWatch tool.

"While we are still cognisant of the softer domestic demand

conditions that are being weighed down by rising energy costs,

our U.S. CPI forecasts have been revised higher in 2026 again

with risks still biased towards the upside," said Alvin Liew,

senior economist at UOB.

"We now expect an extended period of pause to cover the

remainder of 2026 before the Fed resumes easing in 2027."

In other currencies, sterling fell to a one-month low of

$1.3364, having slid 0.9% in the previous session following the

resignation of British health minister Wes Streeting, deepening

the political crisis there.

"The prospect of a potentially disruptive leadership

transition and yet another challenging fiscal backdrop heading

into the autumn is likely to weigh on sentiment," said Henry

Cook, senior Europe economist at MUFG Bank.

"We see the balance of risks to the UK outlook as firmly

skewed to the downside."

The Australian dollar edged away from its recent

four-year peak on the greenback's strength and traded 0.4% lower

at $0.7190.

The New Zealand dollar fell 0.55% to $0.5879.