(Adds BofA strategist quotes, UK political news, updates

prices)

* Dollar steady, heading for second weekly loss

* Investors exit safe-haven positions on Middle East

peace hopes

* Trump says U.S.-Iran talks could take place over the

weekend

* Yen near 160/dollar as Ueda leaves markets guessing on

next hike

By Lucy Raitano and Jiaxing Li

LONDON/HONG KONG, April 17 (Reuters) - The U.S. dollar

headed for a second consecutive weekly decline on Friday, while

the euro and British pound steadied around pre-war levels, as

investors unwound safe-haven positions on optimism stemming from

a ceasefire between Israel and Lebanon and prospects for fresh

Iran talks.

A 10-day ceasefire between Lebanon and Israel went into effect

on Thursday and U.S. President Donald Trump said the next

meeting between the U.S. and Iran could take place over the

weekend.

Meanwhile, U.S. and Iranian negotiators have scaled back

ambitions for a comprehensive peace deal and are now seeking a

temporary memorandum to prevent a return to conflict, with the

nuclear issue remaining a core obstacle.

The dollar index, which measures the greenback's

strength against six major peers, slipped 0.02% to 98.185. It

was on track for a second straight week of declines, having

given up most of the gains sparked by the war, as ceasefire

optimism continued to reduce demand for safe-haven assets.

"Markets are relatively calm... it's the prospect of an

extension of the ceasefire, or let alone a permanent

ceasefire... our bias for the dollar for the year remains

bearish, however in the near term, we are sceptical," said

Michalis Rousakis, forex strategist at BofA.

The euro was steady at $1.178225and on track for a

third straight weekly gain.

"The euro dollar is currently at the level where it was

just before the Iran war despite energy prices being a lot

higher than then. This suggests that markets have slightly gone

ahead of themselves," he said.

Rousakis said BofA's commodity team expected energy prices

to normalise over time but that it could take several months.

"Energy prices remaining at those levels is inconsistent

with the euro at 1.18," he said.

Sterling, meanwhile,was unchanged at $1.35225,

even as British Prime Minister Keir Starmer faced renewed calls

for his resignation from his political opponents after it was

revealed his former ambassador to the United States failed

security vetting but was still allowed to take up the job.

Both the euro and the pound have now largely recouped losses

triggered by the Iran conflict, hovering near their highest

levels in seven weeks.

Against the yen, the dollar was steady at 159.225. Bank

of Japan Governor Kazuo Ueda on Thursday steered clear of

signalling a rate hike was on the cards this month, heightening

the chance it will hold fire at least until June.

The risk-sensitive Australian dollar fetched $0.71710,

staying near four-year highs while the kiwi traded

roughly 0.1% lower at $0.5887.

In a Friday note, Commerzbank FX analyst Michael Pfister

said that implied FX volatilities were showing "hardly any sign

of major uncertainty" with a key one tracked by Commerzbank also

back at pre-war levels.

"Even if the war were to end, surely the next crisis is

waiting for us. The US president has this week once again turned

his attention to his favorite topic: the Fed. Geopolitically,

Cuba appears to be his next target, not to mention his regular

attacks against NATO," Pfister wrote.

MARKETS WATCH CENTRAL BANK RESPONSE TO INFLATION RISKS

Investors are keen to see how policymakers will tackle

war-induced inflation pressures, with central banks taking a

largely cautious stance for now.

U.S. Treasury yields held steady on Friday, after rising in

the previous session, as still-elevated oil prices kept

inflation worries alive.

The two-year yield was last at 3.7732%, while the

benchmark 10-year yield was steady at 4.3054%.

Fed funds futures show markets continue to bet that the Federal

Reserve will keep rates on hold this year, sharply shifting from

expectations of two rate cuts that were priced in before the war

began.

Group of Seven finance ministers and central bank governors have

agreed to remain ready to act to mitigate economic and inflation

risks caused by the Middle East conflict's energy price and

supply shocks, French Finance Minister Roland Lescure said on

Thursday.

The cautious tone was echoed by European Central Bank

policymakers, who played down the chance of a rate hike as soon

as this month, arguing that more data will be needed and the

precise timing of a move was of secondary importance.

New applications for U.S. unemployment benefits fell more than

expected last week, suggesting labour market conditions remained

stable. That is also seen giving the Fed room to keep interest

rates unchanged for some time while policymakers monitor the

inflation fallout from the war.