* 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 near some of their strongest levels this week on Thursday after bleak U.S. retail sales data rekindled worries about the economy, prompting investors to reduce bets on riskier 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 2.6 percent after Wall Street tumbled following the sales data.
"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," said Minoru Shioiri, chief manager at Mitsubishi UFJ Securities.
"The currency market is largely driven by investor sentiment, which has been swayed by recent mixed economic data and news," 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.
It then pared its losses to stand 0.2 percent lower at $1.3573. The single currency had 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, although cross/yen pairs later trimmed their losses.
Against the yen, the euro hit its lowest in two weeks at 128.87 yen but later in the day it was up 0.1 percent on the day at 129.69 yen.
The liquidation of long cross/yen positions sent the dollar down at one point to 95.14 yen, matching an eight-week low first hit the previous day.
It later pushed back to 95.53 yen, up 0.2 percent for the day.
The dollar was supported against the yen due to buying related to an options barrier at 95.00 yen, traders said.
Masashi Hashimoto, senior analyst at Bank of Tokyo- Mitsubishi UFJ, wrote in a research note that if the dollar breaches support near 95.00 yen -- the bottom of the cloud on daily Ichimoku charts -- it may then drop towards 94.27 yen, a 50 percent retracement of the rise from its January low of 87.10 yen to its April peak of 101.45 yen.
Hashimoto said another downside target in such a scenario would be the dollar's March trough, which was 93.55 yen on EBS.
The dollar index, which measures its value against a basket of six other major currencies, rose 0.1 percent to 82.659, 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 steady at $1.5140 after dipping to as low as $1.5099.
The Australian dollar rose 0.1 percent, while the New Zealand dollar held steady, a day after both currencies fell roughly 2 percent against the dollar. (Additional reporting by Masayuki Kitano and Satomi Noguchi; Editing by Joseph Radford)