SINGAPORE, Aug 18 (Reuters) - The U.S. dollar held near multi-month lows against most major currencies on Tuesday as traders walked back expectations of near-term monetary tightening, although the imminent threat of an escalation in the Middle East war left sentiment fragile.

The ‌euro eased away from two-month highs of $1.1614 it touched on Monday, last fetching $1.1571. Sterling was at $1.3534, just shy of the three-month peak it ‌hit in the previous session.

Data in the past few weeks have pointed to a softer U.S. economy, including unexpected job losses last month and mild inflation readings, leading investors to scale back ​expectations of a rate hike by the U.S. Federal Reserve.

Traders expect a 35% chance of a rate increase at the Fed's September meeting, compared with 52.2% a week ago, according to the CME FedWatch tool. They are also no longer fully pricing in a hike by the end of the year.

Most economists polled by Reuters in the past week expect the Fed to keep its interest rate unchanged next month and through year-end, a view they have held for the past several ‌months.

Analysts though remain cautious about where inflation may head, ⁠even as long-dated bond yields scale multi-decade peaks, especially with the critical Strait of Hormuz remaining effectively shut and the U.S.-Iran conflict simmering.

"Inflation has been above target for most of the past five years, and whilst a high 2% annual ⁠pace may prove acceptable to the Fed, it leaves the inflation process with little to no breathing room in a world of constant supply shocks," said Nohshad Shah, head of EMEA fixed income sales at Citadel Securities.

Iran said it would shift to a "fully offensive" military posture because efforts to negotiate a permanent end to the war have ​stalled, ​a senior Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.

The ​more than five-month long conflict has upended the global rates ‌outlook and stoked inflationary concerns through most of the year.

This week's rising worries helped crimp some of the dollar's losses through safe-haven flows, with the dollar index, which measures the U.S. currency against six other units, trading 0.1% higher at 99.66.

The Australian dollar was at $0.71, hovering near its strongest since early June. The New Zealand dollar slipped 0.38% to $0.588. [AUD/]

BONDS SELL OFF AS OIL RISES BACK ABOVE $90

Bond yields around the world were on the rise again as traders remained wary of the impact of elevated oil prices and a prolonged closure of the Strait of Hormuz, where ship crossings were still in single digits, according ‌to data. [US/]

Brent crude futures rose 0.56% to $91.38 a barrel, touching their firmest levels since July ​30. [O/R]

The yield on the 30-year bond was perched at its highest since 2007, while the ​10-year JGB yield hit its strongest in nearly 30 years. [JP/]

"Bond traders appear ​more concerned about the longer-term inflation outlook than currency traders at present," said Matt Simpson, senior markets analyst at StoneX.

"If ‌bond markets are right — and they have an annoying tendency ​to be — the U.S. dollar's pullback may ​prove short lived."

The spotlight has also been on recent U.S. Treasury auctions for the multi-decade yields demanded by investors to absorb Washington's borrowing needs.

The yen was stuck just below the 160 level, shifting the focus to the Bank of Japan meeting next month, where the central bank ​is set to raise interest rates and is considering ‌hiking more aggressively after that, sources told Reuters.

It was last a touch weaker at 159.72 per dollar, having erased nearly half of ​the gains from the joint U.S. and Japan intervention at the end of July to lift the fragile yen away from a ​40-year low of 163.99.

(Reporting by Ankur Banerjee in Singapore; Editing by Sonali Paul)