FOREX-Dollar near 3-week highs though gains capped

* U.S. retail sales beat forecasts

* U.S. interest rate hike expectations broadly unchanged

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, Aug 16 (Reuters) - The dollar held near a three-week high on Wednesday against a trade-weighted basket of its rivals as strong U.S. retail sales data boosted risk appetite, though markets were wary of chasing gains due to lurking geopolitical risks.

"The North Korea missile fears seems to be abating for now and if the recent bunch of strong U.S. data translates into higher inflation, then markets will start pricing more interest rate increases from the Fed in the coming months," said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.

The dollar index edged higher to 93.86 and was consolidating most of its overnight gains when it hit its highest level since July 26 at 94.14 in the previous session.

U.S. retail sales jumped 0.6 percent in July, handily beating economists' estimate of a 0.4 percent reading, to post their biggest gain in seven months as consumers bought more cars and increased discretionary spending.

But despite the strong data, interest rate expectations remain broadly unchanged with markets expecting the Federal Reserve to raise rates only once over the next 12 months, according to the CME's Fedwatch tool.

Easing fears of armed conflict between the United States and North Korea also prompted investors to buy back riskier assets they had sold last week as fiery rhetoric between the two countries escalated.

Morgan Stanley strategists were wary about reading too much into the dollar's overnight bounce, pointing out that economic data from other countries such as Sweden and Japan have been robust, indicating further dollar gains may be slow.

The euro was steady at $1.1734, after falling as low as $1.1687 overnight, its lowest since late July.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s (Reporting by Saikat Chatterjee; Editing by Angus MacSwan)