FOREX-Yen off highs as geopolitical tensions ease, sentiment fragile

* Yen retreats from Friday's highs as safety demand slows

* Markets still keeping a wary eye on geopolitical developments (Updates levels, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Aug 11 (Reuters) - The yen eased versus the dollar on Monday, having backed off from peaks hit late last week as a slight relaxation in geopolitical tensions dampened demand for the safe-haven Japanese currency.

The dollar inched up 0.1 percent to 102.17 yen, having bounced off Friday's two-week trough of 101.51. The euro edged up 0.1 percent to 136.91 yen , well off an 8-1/2 month low of 135.73 set on Friday.

News (Other OTC: NWSAL - news) on Friday that Russia was ending military drills near the Ukrainian border helped U.S. stocks post their best one-day gain since March.

Asian shares were last up 0.9 percent, regaining some footing after having suffered their biggest weekly fall in nearly five months last week.

In a further boost to risk sentiment, Israel and the Palestinians agreed on Sunday to an Egyptian proposal for a new 72-hour ceasefire in Gaza starting at 2100 GMT.

"The conclusions from the weekend are that conflicts are cooling, and the risk-off events of the past two weeks may see upside risk as de-escalation spreads across the conflicts," said Evan Lucas, strategist at IG (LSE: IGG.L - news) in Melbourne.

With little in the way of major economic data out of Asia on Monday, markets will continue to watch these geopolitical developments.

However, some traders warned that investors could quickly turn risk-averse again, given the volatility of the Russia-Ukraine situation.

The outlook for the global economy also does not look bright enough to encourage strong risk-taking at this juncture, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

There is still uncertainty about U.S. growth in July-September, while Japan's economy may struggle to bounce back in the third quarter after taking a hit in April-June from a consumption tax increase enacted in April, Murata said.

In the euro zone, Germany's economy has shown some resilience but other economies have been weak, he added.

"The current situation isn't as good as people had expected, and I think it's difficult to expect risk appetite to strengthen.

"We think the dollar will continue to find it difficult to push higher versus the yen," Murata said, adding that it was also notable that the U.S. 10-year Treasury yield was still hovering at levels roughly around 2.4 percent.

While the U.S. 10-year yield has pulled up from Friday's 14-month low of 2.349 percent, it remains well below a recent peak near 2.69 percent touched in early July.

The euro eased 0.1 percent to $1.3401, staying above Friday's intraday low of $1.3344.

Commodity currencies also enjoyed a reprieve with the Australian dollar holding steady at $0.9280, off a two-month low of $0.9239 plumbed on Friday.

Aussie bulls were still recovering from last week's setbacks - a shock jump in the country's jobless rate and then a downgrade in the central bank's forecasts for economic growth. (Editing by Shri Navaratnam and Eric Meijer)