* Dollar, yen hold near week's highs vs euro, Aussie, kiwi
* Dollar briefly hits 2-month low vs yen
By Kaori Kaneko
TOKYO, May 14 (Reuters) - The yen and dollar held on to some of their strongest levels this week after bleak U.S. retail sales data rekindled worries about the economy, prompting investors to reduce bets on risky assets. Wednesday's data showed sales at U.S. retailers fell for a second straight month in April, denting hopes the economy would soon pull out of recession.
Tokyo's Nikkei share average fell over 2 percent after Wall Street tumbled following the sales data.
"The currency market is largely driven by investor sentiment, which has been swayed by recent mixed economic data and news," said Minoru Shioiri, chief manager at Mitsubishi UFJ Securities.
"Hopes for the U.S. economy's recovery from the recession have dominated the market. But when U.S. stocks fell after the economic data dampened such a view, currency market sentiment turned pessimistic about the real economy," he said.
But if more data gave positive signals, market sentiment was likely to reverse, Shioiri said.
The euro fell to its lowest this week at $1.3525 on trading platform EBS as traders dumped aggressive short-dollar positions accumulated earlier in the week.
The euro then pared its losses to stand 0.3 percent lower at $1.3558. It hit a seven-week high of $1.3722 on Wednesday.
The slide on Wall Street and a fall in Asian stocks also prompted investors to liquidate long positions in euro/yen and other yen crosses. The euro dipped to its lowest in two weeks at 128.87 yen and then pared some of its losses to 129.35 yen, down 0.2 percent on the day.
The liquidation of long cross/yen positions sent the dollar down at one point to an eight-week low of 95.14 yen. It later pushed back to 95.41 yen, up 0.1 percent.
Traders said the dollar will be supported around 94.27 yen, a 50 percent retracement between January's low of 87.10 yen and the April high of 101.45 yen.
The dollar index, which measures its value against a basket of six other major currencies, rose 0.2 percent to 82.757, after it touched a four-month low of 81.871 on Wednesday.
"Uncertainty over the economic outlook is prevailing in the market," said Kazuyuki Kato, treasury department manager at Mizuho Trust & Banking.
"A sustainable recovery in stocks and the dollar's fall in relation to that are unlikely in an environment where the U.S. banking sector has a long way to go to full recovery and there are worries about U.S. auto sector," he said.
Sterling remained under pressure after the Bank of England said on Wednesday it expected anaemic UK inflation and the economy to recover more slowly than previously forecast.
The pound was down 0.2 percent at $1.5119 after dipping to $1.5099.
The Australian and New Zealand dollars, which fell roughly 2 percent against the dollar on Wednesday, were both holding steady near the previous day's lows. (Additional reporting by Satomi Noguchi; Editing by Michael Watson)