Recasts throughout

By Stefano Rebaudo

May 12 (Reuters) - The U.S. dollar extended gains for a second straight session on Tuesday, underpinned by sustained uncertainty over the Middle East conflict that drove investors into the greenback as a traditional safe haven.

The greenback rose sharply in March as the currencies of oil-reliant economies such as Japan and the euro area were heavily sold after oil prices surged following Iran’s effective closure of the Strait of Hormuz.

It weakened again after April 7, the start of a ceasefire, which Donald Trump threatened on Monday to end, dismissing Iran's proposal as "a piece of garbage." The greenback now stands close to its pre-war levels.

“It appears unlikely that a breakthrough would be achieved before the Trump-Xi summit later this week,” said Mohit Kumar, an economist at Jefferies.

Trump is expected to arrive in Beijing on Wednesday, where Iran is set to be among the topics discussed with Chinese President Xi Jinping.

CRUDE OIL PRICE SUPPORTING DOLLAR

“As long as crude oil prices stay high, because of the U.S.' blockade [of Iranian ports] and Iran's threat to tanker traffic in the Gulf, the dollar will stay strong,” said Thierry Wizman, global forex and rates strategist at Macquarie Group.

“The toll that high oil prices will take on the rest of the world's economies will be much more pernicious than the toll [on] the U.S.,” he added.

Oil prices rose 2% <LCOc1> on Tuesday as hopes for a deal to end the war on Iran faded. O/R

Wizman also argued that the U.S. administration has probably decided that its economic blockade of Iran -- the 'economic war' -- could be more effective than resuming bombing runs.

The U.S. dollar index =USD, a measure of its value against a basket of major foreign currencies, was up 0.35% at 98.30. It was at 97.85 on February 27 and hit 100.64 in late March. It fell below its pre-war levels late last week.

RATE OUTLOOK IN FOCUS

Investors are also closely watching the monetary outlook, with the Federal Reserve now expected to keep rates higher for longer to tackle inflationary pressures, while traders are betting that the European Central Bank will hike its depo rate to about 2.75% by year-end from the current 2%. EURESTECBM5X6=ICAP

The euro fell 0.33% to $1.1744 EUR=EBS.

Eyes will be on a U.S. inflation report due later in the session, which is forecast to show that consumer prices rose 0.6% last month after jumping 0.9% in March, according to a Reuters survey of economists. Estimates ranged from a 0.4% gain to a 0.9% rise.

The data could reinforce the view that the Federal Reserve is likely to keep interest rates unchanged in the near term. Traders have priced out the prospect of rate cuts for the year compared to the two cuts expected before the Iran war broke out.

YEN STILL IN INTERVENTION WATCH ZONE

The Japanese yen jumped suddenly in the late Asian session on Tuesday, stoking speculation of a "rate check", often a precursor to currency intervention.

The dollar was last at 157.57 against the yen JPY=EBS, up 0.25% on the day, after U.S. Treasury Secretary Scott Bessent said he had great confidence that Bank of Japan Governor Kazuo Ueda will guide the central bank to a "very successful" monetary policy.

Japan's authorities have supposedly spent nearly $63.7 billion in the current round of interventions.