* Dollar index hits lowest since early June
* Dollar rises to three-week high vs yen
* U.S. new home sales rise sharply in June (Adds quotes, updates prices; changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 27 (Reuters) - The U.S. dollar fell to its lowest in more than seven weeks against the euro on Monday as a jump in U.S. new home sales bolstered the market's appetite for riskier assets and dimmed the greenback's safe-haven appeal.
The yen also fell broadly, pushing the dollar against the yen to its highest in three weeks and pushing the euro to its strongest level in nearly a month.
Both the U.S. and Japanese currencies tend to fall when risk appetite improves.
"Risk appetite is currently the driver in the market. Statistics such as the housing data are less bad," said Joe Trevisani, chief market analyst at FX Solutions in Ridgewood, New Jersey.
"So we're seeing a weaker dollar. Euro/yen is also up and that's pushing euro/dollar higher as well."
In mid-afternoon New York trading, the euro rose to $1.4299, its highest since June 3, according to Reuters data. It was last at $1.4227, up 0.2 percent from late Friday.
The euro was also buoyed by data showing German consumer sentiment at its highest level in over a year.
Gains in the euro pushed the ICE Futures U.S. dollar index, a measure of its value against six major currencies to its lowest since early June at 78.396. The dollar index last traded at 78.685, down 0.1 percent on the day.
The euro also hit its highest level in nearly a month against the yen at 136.09 yen, and last traded up 0.6 percent at 135.33 yen.
The dollar was up 0.4 percent at 95.12 yen, after hitting a session peak of 95.38 yen, the highest in almost three weeks.
The dollar has come under pressure in recent sessions as upbeat economic data and largely positive results on the U.S. corporate earnings front fueled expectations the global economy was on the mend.
INVESTORS REMAIN WARY
Investors sold the dollar after data showing sales of new single-family homes in the United States rose 11 percent in June from the prior month.
Analysts said data shows further evidence that the housing sector, which led the economy into the current recession, was starting to rebound. On a three-month moving average, the report suggested that new home sales may have hit a bottom in January, and are starting to increase slightly.
But some currency market participants cautioned against reading too much into the housing numbers.
"The data this morning was better than expected but people did a 180-degree turn after they saw that prices were still down -- close to 6 percent," said Matt Kassel, director of foreign exchange trading at ING Capital Markets in New York.
"You see something comes off 6-10 percent, you will lose a little bit of inventory and that clearly what took place there. So I don't think it's all that great and you see the euro come off its highs."
Analysts also said the recent surge in market optimism may begin to fade as caution sets in ahead of U.S. gross domestic product data on Friday. A Reuters polls showed markets are expecting the U.S. economy declined 1.5 percent in the second quarter from a 5.5 percent contraction in the first three months of the year.
"The rally has become a little bit overstretched, not just in equities, but in risk assets in general," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.
He said the heavy short dollar positions in the market also suggested that "we could be due for a little bit of a correction given the fact the market is very heavily skewed against the dollar."
Data from the Commodity Futures Trading Commission on Friday showed speculators nearly doubled their bets against the dollar in the week ended July 21. The value of dollar net short positions hit its highest since mid-July 2008.
(Additional reporting by Wanfeng Zhou) (Editing by Theodore d'Afflisio)