* Euro helped by rising European money market rates
* Large $1.30 option barriers in sight, slowing gains
* Dollar index hits lowest since early May; US data awaited
(Changes lead, adds quote, detail)
By Jessica Mortimer
LONDON, July 16 (Reuters) - The euro hit a fresh two-month high versus the dollar on Friday, supported by rising European money market rates which took it close to barriers at $1.30 while a deteriorating U.S. economic outlook dented the dollar.
The dollar slid to a two-and-a-half month low versus a currency basket as this week's poor U.S. data and dovish Federal Reserve comments increased concerns about a slackening in the world's largest economy.
However, traders said large option and stop loss barriers at the psychologically key $1.3000 level were being defended, slowing the euro's gains.
Easing euro zone sovereign concerns lifted the euro, along with a further rise in euro zone bank-to-bank lending rates due to reduced spare European Central Bank cash in money markets. [ID:nEAP000481] [ID:nEAP000035]
"The euro has been supported by the combination of reduced euro zone systemic risk after successful peripheral government bond auctions this week and weaker cyclical fundamentals behind the dollar given signs of slowing U.S. consumer spending and manufacturing activity," said Lena Komileva, G7 market economist at Tullett Prebon.
"On the other hand, the rise in Eonia and Euribor rates since the expiry of ECB 12-month money at the end of June has increased demand for euros," she added.
At 1121 GMT, the euro
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, helped by smooth government bond auctions in Greece, Portugal and Spain easing debt concerns.
U.S. DATA AHEAD
The dollar index <.DXY> fell 0.4 percent to 82.235, having hit a low of 82.211, its weakest since early May. Earlier this month, the dollar index broke below the daily Ichimoku cloud, suggesting more losses may be in store.
U.S. inflation data and a University of Michigan consumer
sentiment survey due for release on Friday will be closely
watched and more bad news on the U.S. economy could give further
fuel to dollar bears, analysts and traders said.
"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.
Against the yen, the dollar
Market participants closely watched whether the dollar could hold above its July 1 low of 86.96 yen, its lowest since early December. A fall below that would boost the possibility of a drop to 84.82 yen, a 14-year low reached last November.
Elsewhere, the New Zealand dollar
(Additional reporting by Neal Armstrong; Editing by Ron Askew)