* U.S. July existing home sales up for 4th straight month
* Bernanke says prospects good for return to global growth
* Euro supported by euro zone service, manufacturing data
* Australian, New Zealand dollars benefit from oil rally (Adds comments, details, updates prices)
By Wanfeng Zhou
NEW YORK, Aug 21 (Reuters) - The dollar and yen fell on Friday after a strong U.S. housing sales report and upbeat comments from Federal Reserve Chairman Ben Bernanke reduced the safe-haven appeal of the U.S. and Japanese currencies.
At an annual Fed conference in Jackson Hole, Wyoming, Bernanke gave his clearest signal yet that a recovery is at hand, although he warned that growth would be sluggish.
In addition, U.S. existing-home sales rose in July for a fourth straight month, and a euro zone service sector and manufacturing survey showed more improvement than expected. The data bolstered optimism about the global economy and lifted the euro to a two-week high versus the dollar.
"We've hit a bottom in the housing market. I think you're going to see further dollar and yen declines on that outlook," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.
"As conditions improve both here and in Europe ... there's less need for safer-haven currencies as the yen and dollar have been in the past year. The market moves into riskier assets."
In late New York trading, the euro rose 0.6 percent at $1.4333 after hitting a session peak of $1.4375, the highest since Aug. 7, according to Reuters data. It was also up 0.7 percent at 135.18 yen.
"Both (Bernanke and housing data) were more bullish than what the market was looking for. The market is just taking those headlines as extreme positives for the outlook both in the U.S. and globally," said Jacob Oubina, currency strategist at Forex.com in Bedminster, New Jersey. "It's back to the whole risk-on trade."
The dollar was up 0.1 percent at 94.29 yen, off a session high of 94.71 yen, after trading as low as 93.40 yen.
CAUTION REMAINS
"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke said.
But he stopped short of issuing an all-clear. "Although we have avoided the worst, difficult challenges still lie ahead," he said, cautioning that the "recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
Analysts said while investors may be getting confident that the worst recession in decades is ending, it was unclear how the recovery is going to unfold.
"The uncertainty is still how bumpy the road is going to be ahead," said Mizuho's Eliasson. "The dollar is going to continue to weaken ... (but) I think it's going to be a slow, gradual weakening because the recovery is going to take time and be quite slow in progression."
Earlier, a survey showed the decline in the euro zone services sector almost came to a halt in August while manufacturing shrank far slower than expected, lifting the euro to a one-month high against sterling.
Commodity-linked currencies also rose as oil hit its highest price of the year so far, helping revive risk appetite. Trading was quiet, though, with many investors on vacation.
The Australian dollar rose 0.3 percent to $0.8335 and the New Zealand dollar was up 0.7 percent to $0.6818. (Additional reporting by Vivianne Rodrigues; Editing by James Dalgleish)