* Trump postpones strikes on Iran power grid for five

days

* Markets cautious with Iran denying US negotiations took

place

* Dollar recoups some of its overnight losses as war

rages on

(Updates prices, adds more comments and context)

By Jiaxing Li

HONG KONG, March 24 (Reuters) - The dollar firmed

slightly on Tuesday as investor sentiment turned cautious, with

the war in the Middle East raging on and markets sceptical of a

swift resolution even though U.S. President Donald Trump delayed

the bombing of Iran's power grid.

Trump wrote on his Truth Social platform that the U.S. and

Iran had held "very good and productive" conversations about a

"complete and total resolution of hostilities in the Middle

East". Iran denied it had engaged in any direct negotiations.

The contrasting comments and a fresh wave of fighting left

markets in flux as traders weighed Trump's post in which he

postponed the bombing for five days. Still, markets were mindful

of the war all but halting shipments of about one-fifth of the

world's oil and liquefied natural gas through the Strait of

Hormuz.

"The news overnight is giving a breather to volatility at

least, but it's difficult to see that this is going to trigger a

risk-on trend," said Rodrigo Catril, ‌a currency strategist at

National Australia Bank.

Trump's policy track record was keeping markets wary, with

traders uncertain whether this marked the start of genuine

negotiations or simply a retreat from volatility-inducing

threats, Catril said.

Sterling eased 0.49% to $1.3388 after jumping

nearly 1% on Monday, while the euro was down 0.3% at $1.1583

after gaining 0.4% in the previous trading session.

The Australian dollar fell 0.6% to $0.6968, pulling

back from a six-week high. The New Zealand dollar was down 0.5%

at $0.5832.

The yen was on the back foot at 158.73 a dollar after

Japan's core consumer inflation rate hit 1.6% in February. That

was below the Bank of Japan's 2% target for the first time in

nearly four years, complicating the bank's efforts to justify

further interest rate hikes.

Oil prices edged higher after plunging more than 10% on

Monday, with Brent crude futures retopping $100.94 a

barrel on supply concerns.

DOLLAR ADVANCES AFTER BRIEF DIP

"The key question is whether participants see this as a

genuine extension that brings a deal closer, or simply a delay

that prolongs uncertainty," said Chris Weston, head of research

at Pepperstone.

"The U.S. dollar has seen selling on the back of the move

lower in crude and the broader repositioning in risk. However,

there is little conviction in the move, and conditions remain

ripe for sharp reversals."

Iran launched multiple waves of missiles at Israel, the

Israeli military said, with Iran's elite Revolutionary Guards

saying they were launching fresh attacks on U.S. targets, and

describing Trump's words as "psychological operations" that were

"worn out" and having no impact on Tehran's fight.

The dollar index, which measures the U.S. currency

against a basket of peers, rose 0.2% to 99.387 after dipping

0.4% to near a two-week low on Monday.

The index has strengthened 1.8% this month, on track for its

strongest monthly gain since October, as the conflict fuelled

safe-haven demand and resulted in traders no longer fully

pricing a rate cut this year from the Federal Reserve.

That supportive case is likely to continue to hold true,

with the impact of higher oil prices trickling through and no

resolution to the war in sight, said Sim Moh Siong, FX

strategist at OCBC.

"In the near term, the dollar may stay supported as long as

there are no visible signs of de-escalation," he added.

The two-year U.S. Treasury yield, which

typically moves in step with Fed rate expectations, rose 7.7

basis points to 3.908% in Asian hours after dropping 6.3 bps on

Monday.