The U.S. dollar lingered near six-week lows on Wednesday, surrendering nearly all the gains it had made since the Middle East war erupted as hopeful signs of another round of talks between the U.S. and Iran lifted risk appetite.

Tehran has effectively shut the Strait of Hormuz, a crucial waterway for a fifth of global oil and gas shipments, since the U.S.-Israel war with Iran began on February 28, a move that has sent oil prices surging and dampened investor sentiment.

Washington imposed a blockade on Iranian ports after the collapse of weekend negotiations but hopes grew as U.S. President Donald Trump said on Tuesday talks to end the war could resume in Pakistan in the coming days.

The euro EUR= bought $1.1793, hovering near its highest since March 2. Sterling GBP= was at $1.3574. The dollar index =USD, which measures the U.S. currency against six units, was at 98.109, near its lowest in over six weeks.

Although talks in Islamabad last weekend failed to produce a breakthrough - raising doubts over the durability of a two-week ceasefire that still has a week to run - investors are clinging to hopes that diplomacy could yet deliver a resolution.

"There is a growing expectation that the standoff will soon be resolved, allowing the U.S. administration to pivot towards declaring victory, before stimulating the economy ahead of the midterms," Tony Sycamore, market analyst at IG.

Brent crude futures LCOc1 fell 0.28% to $94.52 a barrel after tumbling 4.6% in the previous session. U.S. West Texas Intermediate CLc1 crude was down 0.7% to $90.64 after dropping 7.9% on Tuesday.

That spurred a risk-on rally across asset classes with stocks surging and the risk sensitive Australian dollar AUD= hitting its highest level since March 12. The Aussie was steady at $0.7124 in early trading.

"Cross-asset moves suggest investors are increasingly pricing the conflict as a temporary energy shock that could fade if diplomacy holds," OCBC strategists said in a note. "The broader signal was decisively risk-on rather than defensive positioning."

The Japanese yen JPY= was little changed at 158.88 per U.S. dollar in early trading. Bitcoin BTC= was 0.6% higher at $74,612, just below the two month high it touched on Tuesday.

-Ankur Banerjee/Reuters