* Euro helped by rising European money market rates
* Dollar falls to seven-month low vs yen
* Drop in U.S. consumer sentiment weighs on dollar (Adds comments, details. Changes byline)
By Nick Olivari and Vivianne Rodrigues
NEW YORK, July 16 (Reuters) - The euro stepped back after touching a two-month high versus a broadly weaker dollar on Friday, as investors bet that gains supported by rising European money market rates were overdone.
A private survey showing U.S. consumer sentiment weakened in early July to an 11-month low added to negative sentiment on the greenback and drove the dollar to a seven-month low against the yen. For more see [ID:nN16126985].
Reports on U.S. consumer price inflation and capital flows into the United States did little to change investor sentiment. See [ID;nN16242811] and [ID:nN1699306].
"The euro is still relatively well bid and I would not be surprised to see 1.3200 next week as people continue to want to get out of these mature short positions," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York. "It just got a little too far, too fast."
In afternoon trade in New York, the euro was slightly lower at $1.2920 EUR=, after earlier rising to a two-month high of $1.3008 on electronic trading platform EBS EUR=EBS.
The break above $1.3000 will bring resistance at $1.3125 into play, the 38.2 percent retracement of the euro's fall from November to June.
"I don't think that we can conclude that today's move represents a shift in sentiment, more just the result of traders taking risk off the table as we head into the weekend," said Dan Cook, a senior market analyst at IG Markets, in Chicago.
Also bolstering the single currency was the recent rise in euro-priced bank-to-bank lending rates that picked up pace on Friday, pushed on by a sharp drop in spare European Central Bank cash in money markets. [ID:nEAP000481]
"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 in London.
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.
Stress tests being conducted in the European Union will show that all the major European banks have sufficient capital, the head of the International Monetary Fund, Dominique Strauss-Kahn, said on Friday, further erasing concerns about fiscal problems in the euro zone. Results of the stress tests will be published on July 23. [ID:nLDE66F0Z6]
Some analysts, however, 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 in London. "If the Fed isn't going to hike, it's hard to see the ECB hiking first."
Investors are closely watching the dollar against the yen on the possibility of the greenback dropping to a 15-year low by breaching the November 2009 trough of 84.81 on Reuters data and 84.82 on electronic trading platform EBS.
The dollar was down 0.9 percent at 86.67 yen JPY= after falling as low as 86.27 yen on EBS JPY=EBS.
The yen's latest rise has brought it to levels that could cause pain to Japanese exporters if the gains are sustained. The Bank of Japan's tankan survey showed the average forecast for the dollar/yen rate in the year to next March among large manufacturers is 90.18 yen. (Additional reporting by Jessica Mortimer in London; Editing by Leslie Adler)