* Dollar rebounds broadly after sharp selloff
* Weak euro zone output data hurts euro
* G8 finance ministers' meeting in focus (Adds details, updates prices)
By Vivianne Rodrigues
NEW YORK, June 12 (Reuters) - The U.S. dollar rose broadly on Friday, rebounding from a selloff earlier this week, while demand for the euro fell after data showed a plunge in euro zone industrial production.
Commodity currencies, including the Canadian and Australian dollars, also fell after sharp gains this week in tandem with a drop in oil prices, and as G8 finance ministers prepared to meet in Italy.
The dollar had spent most of the week under pressure as investors, betting on a global recovery, bought higher-yielding currencies and assets such as stocks and commodities. Analysts and traders said the dollar's sharp drop was not fully supported by economic fundamentals and that investors were largely taking profits on Friday.
"The top performers on the week are the worst performers today," said Meg Brown, a currency strategist at Brown Brothers Harriman in New York. "We're seeing a classic correction."
The dollar was off its session highs in late afternoon trading in New York but remained firmer against major currencies.
The euro last changed hands at $1.4002 <EUR=EBS>, down 0.7 percent but off a session low at $1.3935, according to electronic trading platform EBS. Sterling was down 0.8 percent at $1.6433 <GBP=D4> after having moved above $1.66 on Thursday.
The dollar rose 0.8 percent at 98.35 yen <JPY=EBS> and 1.4 percent against the Canadian dollar to C$1.1182 <CAD=D2>.
Profit-taking on the euro accelerated after data showed industrial production in the 16-country euro zone plunged 21.6 percent in the year to April. [ID:nBRQ007375]
"Euro zone industrial output disappointed already weak expectations," Brian Kim, a currency strategist at UBS AG said in a note. "The data will add to calls for a prompt start to the ECB's proposed covered bond purchasing scheme and the euro weakened on the news."
G8 MEETING STARTS
U.S. data was more cheerful. A survey showed consumer sentiment hit a nine-month high in June and expectations for inflation rose [ID:nN12549197].
Some analysts said that bolsters an argument, advanced by some currency traders, that the United States will be the first to exit recession, clearing the way for a stronger dollar.
"We're edging into an environment where markets will start picking winners and losers in the global recovery story," said Wells Fargo strategist Vassili Serebriakov. "We're not quite there yet, but there are hints of moving in that direction."
Inflation fears helped push the 10-year Treasury yield to 4 percent this week for the first time since October, and investors have debated whether higher bond yields reflected a strengthening U.S. economy or fears the United States may run into trouble financing a record $1.8 trillion budget deficit.
For now, though, strategists said policymakers are worried about dollar weakness. Exchange rates are not on the agenda at a two-day meeting of the Group of Eight finance ministers starting on Friday, but analysts said the issue may come up in light of the dollar's recent slide, which has undermined euro-zone exports by making them more costly.
Japanese Finance Minister Kaoru Yosano said before the start of the G8 meeting that the Japanese government has "complete trust in the fact that the United States views its strong-dollar policy as fundamental."
Yosano, who made the comments in a Bloomberg interview, was also quoted as saying: "Our trust in Treasuries is absolutely unshakable."
Japan is the second largest foreign holder of Treasuries behind China, and Yosano's comments helped push Treasury yields lower, UBS's Kim said.
UBS sees the euro trading back at $1.30 in three months. (Additional reporting by Steven C. Johnson; Editing by Padraic Cassidy)