Nov 25 (Reuters) - The dollar index dropped the most in two weeks on Monday, driven by declining Treasury yields, which eased as oil prices fell and markets displayed optimism about President Trump's appointment of budget-conscious Scott Bessent as Secretary of the Treasury.

Oil and gold were lower on reports of Israel nearing a ceasefire with Hezbollah with Israel's cabinet meeting on Tuesday to approve the deal.

The euro rose on short-covering as the risk tone improved.

The European Central Bank should not keep its monetary policy tight for too long or inflation could fall below target, ECB Chief Economist Philip Lane said, while praising the bank's gradual approach to cutting rates.

Germany is stuck in a period of economic weakness but central bank interest rates need to come down only gradually to make sure inflationary pressures are fully extinguished, Bundesbank President Joachim Nagel said.

Germany's IFO report showed business morale fell more than expected in November.

Five European countries will step up their support to strengthen Ukraine's defense industry as the country heads into the third winter at war, Germany's defense minister Boris Pistorius told reporters.

The Swiss franc posted its best day in three-months amid lower yields.

The pound was stronger after Bank of England Deputy Governor Clare Lombardelli said she was more worried about the risk that inflation comes in higher - not lower - than the central bank has forecast.

British finance minister Rachel Reeves said she would never have to repeat the tax hikes of her first budget.

Treasury yields were down 8 to 14 basis points as the curve flattened. The 2s-10s curve was down 4 basis points at +1.5bp following a 2-year auction.

The S&P 500 rose 0.27%, fueled by gains in consumer discretionary and real estate.

Gold slid 3.4% amid talks of a Middle East ceasefire and Bessent nomination.

Copper was up 0.38% after China's central bank injected liquidity into the banking system.

Heading toward the close: EUR/USD +0.79%, USD/JPY -0.45%, GBP/USD +0.32%, AUD/USD +0.02%, DXY -0.7%, EUR/JPY +0.43%, GBP/JPY -0.10%, AUD/JPY -0.45%.

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(Editing by Burton Frierson Reporting by Robert Fullem)

((robert.fullem@thomsonreuters.com;))