PROBLEM SOLVED
So reporting back to all that are curious: starting from the end - I replaced the rear pads with Galfer Purple E-bike pads - problem solved. Squealing gone, vibrations gone, brakes are dead silent (for now, after 2 rides).
So prior to trying that: I went to SRAM booth at Sea Otter, and they confirmed the little gap on the rotor surface is typical of HS2 rotors and the alignment is fine (this is different from Centerline rotors that won't have a gap).
They also confirmed the adapter was the correct one BUT they suggested trying the SRAM 20p-2 adapter which attaches differently - instead of bolt going through both caliper and adapter like came with my bike, on the 20p-2 one bolt attaches the adapter to bike, and another attached caliper to adapter. They also suggested changing the hose attachment angle (be careful with that not to open too much, a half turn is enough). I tried both and it didn't help.
More importantly they did take a look and rule out contamination. So after trying the above, I tried the different pads and problem gone! Now, what I don't know is had I kept my old adapter with the Galfers would it have still solved the issue - but I'm not experimenting anymore, I'm just glad the brakes are back to great!
On a final note - I did previously try SRAM sintered and MTX Gold and neither helped. It could be that the Galfers are made of different material, that handles what is probably my over zealousness of using the rear brake. So not saying Galfers are better pads, just that I've been trying the wrong pad material in the rear that doesn't suit my riding style. And I know people have complaints about the Codes but honestly they feel bulletproof right now!
Thanks all that posted helpful and detailed suggestions!!