The dollar retreated to a two-month low against the euro on Monday as the U.S. currency came under pressure on renewed worries about Iran's nuclear programme. The dollar's latest slip was partly due to the surge in gold and oil prices as Western powers were set to meet in London to discuss tightening sanctions on Iran amid a flurry of tough talk between Washington and Tehran. "Middle East tension is certainly a pressure for the dollar, and as long as uncertainty lingers, it may continue to hurt the currency," said a trader at a Japanese bank. But traders also said they didn't expect a sustained dollar move based on the Iran situation alone, especially with a slew of indicators this week on U.S. growth, manufacturing and inflation that will help shape expectations on the interest-rate outlook. The dollar has been hurt as investors believe the Federal Reserve is likely to trim rates from the current 5.25 percent later in the year, even as the European Central Bank seems set to raise rates further next month to 3.75 percent from 3.5 percent. So far Fed officials have indicated that they are wary of inflation pressures picking up further and are not considering cutting rates anytime soon. Activity was light with little major economic data set for release in the United States or Europe this session. The euro climbed as high as $1.3199 on electronic trading platform EBS, the highest since Jan. 3, and stood at $1.3178 as of 0551 GMT, up slightly from late U.S. trading on Friday. The U.S. currency dipped slightly to 120.98 yen after rising as high as 121.64 yen last week, back near the four-year high of 122.20 yen hit in January. The dollar's inability to rise beyond the mid-121 yen zone last week was prompting market players to take profits. "People are cautious about keeping long dollar positions, so we are starting to test lower," said one trader at a U.S. investment bank.