* U.S. 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)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 27 (Reuters) - The U.S. dollar dropped to a more than seven-week low 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 to its highest level versus the Japanese currency in three weeks and lifting the euro to its strongest level in nearly a month. Both the dollar and yen 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 late afternoon New York trading, the euro rose to $1.4299, its highest since June 3, according to Reuters data. It was last at $1.4237, 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.
Analysts at Bank of Tokyo-Mitsubishi UFJ expect, however, that the euro's gains against the dollar will prove limited, with the euro likely to hit a top in the $1.4500-$1.5000 range before year-end. The dollar will then likely gradually appreciate heading into 2010.
"The combination of Federal Reserve tightening initially through the reining-in of excess liquidity, more apparent relative U.S. outperformance over the euro zone...and the significant improvement in the U.S. external position should prove a more supportive environment for the dollar," wrote Lee Hardman, currency economist at Bank of Tokyo in London.
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 78.655, down 0.1 percent on the day.
The euro also hit its highest level against the yen in nearly a month at 136.09 yen, and last traded up 0.7 percent at 135.55 yen.
The dollar was up 0.5 percent at 95.24 yen, after hitting a session peak of 95.38 yen, the highest in almost three weeks.
INVESTORS REMAIN WARY
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 further sold the dollar on Monday after data showing sales of new U.S. single-family homes rose 11 percent in June from the prior month.
Analysts said the data added to evidence that the housing sector, which led the economy into the current recession, was starting to rebound. On a three-month moving average basis, the report suggested that new-home sales hit a bottom in January and are starting to increase slightly.
Some 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 prices were still down -- close to 6 percent," said Matt Kassel, director of FX trading at ING Capital Markets in New York.
"You see something comes off 6 to 10 percent, you will lose a little bit of inventory and that's 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 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 that the U.S. economy declined 1.5 percent in the second quarter compared with a 5.5 percent contraction in the first three months of the year. (Additional reporting by Wanfeng Zhou; Editing by Leslie Adler)