Dollar, yen near week's highs as caution lingers

* Dollar, yen hold near week's highs vs euro, Aussie, kiwi

* Dollar briefly hits 2-month low vs yen

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 from 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. economic recovery from the recession has 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 added.

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 0.2 percent down at $1.3573. 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 but then recovered to stand 0.2 percent up at 129.85 yen.

The liquidation of long cross/yen positions pushed the dollar down at one point to an eight-week low of 95.14 yen. It later pushed back to 95.59 yen, up 0.3 percent.

Sterling remained under pressure after the Bank of England said on Wednesday it expected anaemic UK inflation and the economy to recover slower than previously forecast.

The pound dipped as far as $1.5099 before edging up a fraction.

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. (Reporting by Kaori Kaneko and Satomi Noguchi; Editing by Charlotte Cooper and Edwina Gibbs)