* U.S. dollar index hits one-week low
* U.S. launches air strike in Iraq
* Eyes on next week's U.S. retail sales (Updates prices, adds comments)
By Sam Forgione
NEW YORK, Aug 8 The U.S. dollar hit a one-week low against a basket of major currencies on Friday after escalating geopolitical tensions led traders to take profits on the greenback after its recent strength.
The United States launched its first air strike against Iraq since American troops withdrew from the country in 2011. Fighting has also resumed in Gaza between Palestinian militants and Israel, while the conflict between Russia and Ukraine remained on investors' radar.
The concerns drove traders to book profits on bullish positions in the dollar, while the euro gained after traders took profits on short bets against the shared currency, analysts said.
The profit-taking came after the U.S. dollar index, which measures the greenback against a basket of six major currencies, notched its biggest monthly gain in nearly 1-1/2 years in July.
"Geopolitical issues in different parts of the world are going much further than anyone expected," said Steven Englander, global head of G10 foreign exchange strategy at CitiFX in New York.
The dollar index was still on track to notch its fourth straight weekly gain, however, in the wake of some stronger-than-expected U.S. economic data this week.
President Obama authorized air strikes on Iraq after tens of thousands of Christians fled Islamic State fighters who have crucified and beheaded captives.
The dollar held losses despite a report that Russia's defense ministry said Friday it had finished military exercises it was conducting near the border with Ukraine.
The U.S. dollar index was last down 0.16 percent at 81.395, up modestly from a one-week low of 81.261 touched earlier in the session. The euro was last up 0.36 percent against the dollar at $1.3408.
The dollar was last down just 0.03 percent against the yen at 102.06 yen after hitting a more than two-week low of 101.49 yen. The dollar was last down 0.4 percent against the Swiss franc at 0.9053 franc.
The benchmark 10-year U.S. Treasury note was last up 1/32 in price to yield 2.42 percent after hitting 2.35 percent, its lowest in 14 months.
Analysts said the dollar's losses would likely prove brief.
"These events cause risk aversion initially, but within a day or so, the market has moved on," said Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York, in reference to the events fuelling the day's geopolitical worries.
He said next Wednesday's U.S. retail sales data for July would be closely watched given the importance of consumer spending on gross domestic product growth. Economists polled by Reuters expect a 0.3 percent gain, up from a 0.2 percent rise in June. (Reporting by Sam Forgione; Additional reporting by Gertrude Chavez-Dreyfuss; Editing by W Simon and James Dalgleish)