* Dollar off two-year high after weak capital goods, PMI data
* Euro bolstered by defeat of euroskeptics in Dutch vote
* GRAPHIC-World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates headline, prices, news; adds analyst quote)
By Kate Duguid
NEW YORK, May 24 (Reuters) - The dollar fell on Friday from a two-year high against a basket of major currencies after orders for U.S.-made capital goods fell, further evidence that manufacturing and the broader economy are slowing, due in part to the U.S.-China trade dispute.
The weaker-than-expected data, a closely watched proxy for business spending plans, drove the dollar lower and added to a fall which began Thursday following a report that showed manufacturing activity hit its lowest level in almost a decade in May.
Taken together, the reports suggested a sharp slowdown in U.S. economic growth is under way, which could affect the dollar's safe-haven status.
The dollar index was down 0.27% at 97.587. It was also 0.80% off a two-year high of 98.371 hit in the previous session.
Some analysts initially believed that a trade war would be a boon for the U.S. dollar - both because the currency serves as a safe haven in times of uncertainty and because the United States was likely to be hurt the least, but that has not proven to be true.
"The IMF suggests that U.S. import tariffs are mainly paid for by U.S. companies, depressing their profit margins. Hence, it should not be surprising to see U.S. capex plans being cut radically, which should soon translate into moderating labor market conditions," wrote Hans Redeker, global head of foreign exchange strategy at Morgan Stanley.
China on Friday denounced U.S. Secretary of State Mike Pompeo for fabricating rumors after he said the chief executive of China's Huawei Technologies Co Ltd was lying about his company's ties to the Beijing government.
Escalating trade tensions and weak data have fueled rate cut expectations by the U.S. Federal Reserve. Money markets now broadly expect one rate cut by October followed by another by January 2020.
"In the current circumstances, we strongly suspect that further escalation in protectionism will lead the Fed to consider easing policy," wrote Michael Hanson, head of global macro strategy at TD Securities. "Increases in inflation should be relatively short-lived, while the hit to growth could be more persistent."
Dollar weakness also helped boost sterling from a 4-1/2-month low, though the rally was primarily driven by UK Prime Minister Theresa May's announcement on Friday that she would quit after failing to deliver a Brexit deal.
The move sets up a contest that will bring a new prime minister to power who could pursue a cleaner break with the European Union. The pound was last up 0.5% at $1.272.
The euro was also stronger on Friday, up 0.24% to $1.121, benefiting from the dollar's weakness and from the Dutch part of the EU parliamentary elections. An exit poll showed the Labour party of European Commissioner Frans Timmermans won a surprise victory over a euroskeptic challenger who had been topping opinion surveys.
Reporting by Kate Duguid and Abhinav Ramnarayan; editing by G Crosse