* Dollar index near two-month highs, up for third week
* Markets taking Fed hike risk more seriously
* Robust UK retail sales data bolster sterling
By Ian Chua
SYDNEY, May 20 (Reuters) - The dollar held at its highest in nearly two months against a basket of major currencies early on Friday, on track for a third week of gains as investors awaken to the risk of a hike in U.S. interest rates as early as next month.
New York Federal Reserve President William Dudley on Thursday said the U.S. economy could be strong enough to warrant a rate increase in June or July. comments reinforced surprisingly clear signals of a possibly imminent rate hike in minutes of the Federal Reserve's April policy meeting and underpinned an already firm greenback. dollar index .DXY last stood at 95.293, having been as high as 95.502 - a level last seen on March 29. It was up 0.7 percent this week and has risen 2.4 percent in the past three weeks.
"The market is currently ascribing around a 60 percent chance that the U.S. Fed will hike rates by the July meeting, and NAB has pencilled-in a July rate hike," said Tapas Strickland, economist at National Australia Bank.
"Fed officials are seemingly content with such a pricing," he said, adding an earlier June move could be complicated by the Brexit referendum which occurs a week after the June 14-15 Fed review.
Against the yen, the greenback reached a three-week high of 110.39 JPY= but dipped back below 110.00 as weakness on Wall Street shored up the safe-haven Japanese currency.
The euro also eased against the yen to 123.19 EURJPY=R , though it remained tightly range-bound since bouncing off a three-year trough of 121.48 early this month.
On the dollar, the common currency hovered around $1.1200 EUR= , having touched its lowest in over seven weeks at $1.1180.
A standout performer was sterling, which rose broadly after a robust UK retail sales report diminished chances of an interest rate cut that some investors were factoring in. pound reached a two-week high of $1.4663 GBP=D4 and was last at $1.4603. Its trade-weighted index peaked at 87.9 =GBP , its highest since Feb. 5.
In contrast, the embattled Australian dollar stood at $0.7228 AUD=D4 after briefly dipping below 72 U.S. cents for the first time since early March.
Traders will be hard-pressed to find any market-moving data out of Asia on Friday, a condition that could see the major currencies consolidate through the Asian session.