LONDON/HONG KONG - The U.S. dollar headed for a second consecutive weekly decline on Friday, while the euro and British pound held steady near pre-war levels, as investors continued to unwind safe-haven positions amid growing optimism over a ceasefire between Israel and Lebanon and renewed prospects for U.S.-Iran talks.

A 10-day ceasefire between Israel and Lebanon took effect on Thursday. U.S. President Donald Trump said the next round of talks between the United States and Iran could take place over the weekend.

At the same time, U.S. and Iranian negotiators have reportedly scaled back ambitions for a comprehensive peace agreement and are instead pursuing a temporary memorandum aimed at preventing a return to conflict, with the nuclear issue remaining the main sticking point.

The dollar index, which measures the greenback against six major peers, slipped 0.02% to 98.185. The index was on track for a second straight weekly decline, having given up most of its earlier gains driven by the conflict, as easing geopolitical tensions reduced demand for safe-haven assets.

“Markets are relatively calm... it’s the prospect of an extension of the ceasefire, or even a permanent ceasefire... our bias for the dollar for the year remains bearish, however in the near term, we are skeptical,” said Michalis Rousakis, forex strategist at Bank of America.

The euro was steady at $1.1782 and remained on track for a third consecutive weekly gain.

“The euro-dollar is currently at the level where it was just before the Iran war, despite energy prices being much higher. This suggests that markets have slightly run ahead of themselves,” he said.

Rousakis added that Bank of America’s commodity team expects energy prices to normalize over time, although the process could take several months.

“Energy prices remaining at these levels is inconsistent with the euro at 1.18,” he said.

Sterling was unchanged at $1.3523, even as British Prime Minister Keir Starmer faced renewed political pressure after reports that his former ambassador to the United States failed security vetting but was still allowed to assume the post.

Both the euro and the pound have largely recovered losses triggered by the Iran conflict and are now hovering near seven-week highs.

Against the yen, the dollar was steady at 159.22. Bank of Japan Governor Kazuo Ueda on Thursday avoided signaling an imminent rate hike, reinforcing expectations that policy will remain unchanged at least until June.

The risk-sensitive Australian dollar traded at $0.7171, near four-year highs, while the New Zealand dollar slipped about 0.1% to $0.5887.

In a note on Friday, Commerzbank FX analyst Michael Pfister said implied foreign exchange volatility showed “hardly any sign of major uncertainty,” with key measures returning to pre-war levels.

“Even if the war were to end, surely the next crisis is waiting for us. The U.S. 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 closely watching how policymakers respond to war-driven inflation risks, with central banks largely maintaining a cautious stance.

U.S. Treasury yields were steady on Friday after rising in the previous session, as elevated oil prices continued to fuel inflation concerns.

The two-year yield was last at 3.773%, while the benchmark 10-year yield held at 4.305%.

Fed funds futures indicate markets still expect the Federal Reserve to keep interest rates unchanged this year, a sharp reversal from expectations of two rate cuts priced in before the conflict began.

Group of Seven finance ministers and central bank governors have agreed to remain ready to act to mitigate economic and inflation risks stemming from energy price shocks and supply disruptions caused by the Middle East conflict, French Finance Minister Roland Lescure said on Thursday.

European Central Bank policymakers echoed a cautious tone, downplaying the likelihood of an imminent rate hike and emphasizing the need for more data before making policy decisions.

Meanwhile, new applications for U.S. unemployment benefits fell more than expected last week, signaling continued stability in the labor market. The data is seen as giving the Federal Reserve more room to hold rates steady while assessing the inflation impact of the conflict.

-Reporting by Jiaxing Li in Hong Kong and Lucy Raitano in London; Editing by Kate Mayberry/Reuters