* Euro helped by rising European money market rates
* Large $1.30 option barriers in sight, slowing gains
* Dollar index slips to fresh 2-mth lows
(Changes lead, adds quote, detail)
By Neal Armstrong
LONDON, July 16 (Reuters) - The euro touched a fresh two-month high versus a broadly weaker dollar on Friday as rising European money market rates continued to underpin the shared currency, bringing large option barriers into play.
The dollar stayed pressured, slipping to two-month lows versus a currency basket, after a series of U.S. data this week underscored a slackening in the economy's recovery.
"The euro's going up on light volume, there's not much liquidity today but European yields are rising and that's helping to drag the euro higher," said Paul Mackel, director of currency strategy at HSBC.
The recent rise in euro-priced bank-to-bank lending rates picked up pace on Friday, pushed on by the sharp drop in spare European Central Bank cash in money markets. [ID:nEAP000481]
At 0931GMT, the euro was trading up around 0.2 percent at $1.2970, close to an earlier 2-month high of $1.2983. Traders said large option barriers at $1.3000 were being defended, slowing the euro's gains.
Technical analysts said the picture for the euro had been improved by Thursday's close above the Ichimoku cloud at $1.2785 for the first time since December.
A break above $1.3000 would bring resistance at $1.3125 into play, the 38.2 percent retracement of the euro's fall from November to June.
The euro has risen more than 9 percent from a four-year low of $1.1875 hit on June 7 after smooth government debt auctions in Greece, Portugal and Spain eased concerns about the euro zone's sovereign debt problems.
Analysts said further weakening in the dollar versus other major currencies, particularly the euro, could be limited.
"The dollar's adjustment can be justified as the Fed may have to do more easing, but in the longer term it could start to benefit from safe-haven flows," said Jane Foley, research director at Forex.com.
"If the Fed isn't going to hike, it's hard to see the ECB hiking first," she added.
Market participants closely watched whether the dollar could hold above its July 1 low of 86.96 yen, its lowest since early December, as a fall below that level could boost the possibility of the greenback dropping to 84.82 yen, a 14-year low reached last November.
Last December the Bank of Japan called an emergency meeting soon after the dollar slid to the 14-year trough, and decided to pump 10 trillion yen ($114.5 billion) in three-month funds into the banking system.
The yen's latest rise has brought it to levels that could cause pain to Japanese exporters if its gains are sustained, with the BOJ's tankan survey showing the average forecast for the dollar/yen rate in the year to next March among large manufacturers is 90.18 yen.
Traders said there was talk of stop-loss dollar orders at levels below 87.00 yen.
The dollar was down 0.4 percent at 87.06 yen JPY= after falling as low as 86.97 yen on EBS.
The dollar index dipped 0.4 percent to a 2-month low of 82.242. Earlier this month, the dollar index broke below the daily Ichimoku cloud, suggesting more losses may be in store.
The New Zealand dollar dropped after inflation data was weaker than expectations. [ID:nSGE66E018].
The kiwi NZD=D4 fell 1.8 percent on the day to $0.7145, having stood at around $0.7270 before the data
(Editing by Ruth Pitchford)