* Dollar falls from 3-1/2 month highs vs euro
* U.S. new home sales hit seven-month low in November
* U.S. consumer sentiment rises but misses estimates
* Canadian dollar hits more than 2-week high vs greenback (Updates prices)
By Wanfeng Zhou
NEW YORK, Dec 23 (Reuters) - The dollar declined for the first time in five sessions against the euro on Wednesday after U.S. new home sales unexpectedly fell to a seven-month low last month, denting optimism about the economy.
The government's housing report also included a downward revision to the previous month's figure, a day after a report showing a 7.4 percent jump in November existing home sales increased hopes the hard-hit housing market was stabilizing. For more, see [ID:nN2277248].
Trading was extremely light, which may have exaggerated currency moves; Tokyo was closed for a national holiday and many market players elsewhere have already wound down for the Christmas holidays and year-end.
"It's clearly a disappointing number," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. "You're going to get bumps along the road every so often as far as recovery is concerned. It might change sentiment regarding interest rates and the dollar a little bit."
Optimism about the U.S. economy had stoked expectations the Federal Reserve may raise its borrowing costs sooner rather than later, pushing the dollar to a 3-1/2-month high versus the euro and a basket of six major currencies the previous day.
The euro rose 0.5 percent to $1.4323 <EUR=>. On Tuesday, it hit a 3-1/2-month low of $1.4216 after a third rating agency downgraded Greece's credit rating [ID:nLDE5BL0NG].
Against the yen, the dollar fell 0.2 percent to 91.68 yen after earlier climbing to 91.87 yen <JPY=>, its highest level since late October, according to Reuters data.
Sterling fell to $1.5924, one tick from its weakest level since mid-October, before recovering to $1.5959, down 0.1 percent <GBP=>. Minutes from the last Bank of England meeting suggested officials remain open to a possible expansion of an emergency asset-buying program. [ID:nLDE5BM0JP]
The euro slipped to 1.4891 Swiss francs <EURCHF=>. Traders remained wary of possible action by the Swiss National Bank to curb the franc's strength. The dollar fell 1.1 percent to 1.0375 francs <CHF=>.
CANADIAN DOLLAR GAINS
Analysts said the dollar also dropped as investors sought to lock in gains on the greenback's recent rise.
"You've seen a big move in euro-dollar already. Folks are taking some profits on their long dollar positions ahead of the holiday," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.
Adding to pressure was a survey showing that although a final reading on U.S. consumer sentiment rose in December, it fell short of analyst expectations and trailed the preliminary December figure. See [ID:nN23151816].
The Canadian dollar hit a more than two-week high against the U.S. currency after Canadian Finance Minister Jim Flaherty said in an interview with Bloomberg that China and Russia may diversify their currency reserves into Canadian dollars. The greenback was off 0.9 percent at C$1.0484 <CAD=>. (Reporting by Steven C. Johnson and Wanfeng Zhou; Editing by Leslie Adler)