* U.S. new home sales fall sharply, hurt dollar * Gap between 2-year U.S./Japan bond yield at 1-1/2-year high * Euro hits 1-month high vs yen, Nowotny's comments help By Wanfeng Zhou NEW YORK, Aug 23 (Reuters) - The dollar fell against a basket of currencies on Friday, retreating from a three-week peak against the yen, as a steep drop in U.S. new home sales dented expectations that the Federal Reserve will reduce its asset-buying program next month. The euro climbed above $1.34 after the data, edging back toward a six-month high set on Tuesday. Signs of an improving euro zone economy have buoyed the currency in recent weeks. Sales of new U.S. homes slid 13.4 percent in July to their lowest in nine months, hurt by the rise in U.S. mortgage rates, suggesting an economy that may not be as robust as many people think. "This report makes it look more likely that tapering will come later rather than sooner, perhaps under the leadership of a new Fed chair," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York. The dollar slipped 0.2 percent against a basket of six major currencies to 81.360. Uncertainty about when the Fed will start reducing its $85-billion per month bond buying program has pressured the dollar in recent weeks. Minutes of the Fed's July meeting showed differences of opinion among members of the Federal Open Market Committee as to when the central bank should act. Currency speculators pared their bets in favor of the U.S. dollar for a fifth consecutive week in the week ended Aug. 20, data from the Commodity Futures Trading Commission showed on Friday. The value of the dollar's net long position fell to $13.54 billion, the smallest in two months, from $17.62 billion the previous week. Speculators were bullish on the euro for a third straight week. The euro rose 0.2 percent to $1.3383, helped by comments from European Central Bank policymaker Ewald Nowotny, who said he did not see much reason for the ECB to cut interest rates. He spoke after surveys showed euro zone economic activity quickening. A second reading of German gross domestic product confirmed that Europe's biggest economy grew by 0.7 percent in the second quarter, helped by domestic demand, fueling optimism Europe's largest economy will outperform i 2013. The recent pickup has pushed euro zone money market rates higher, and if sustained, is likely to challenge the effectiveness of the ECB's pledge to keep rates low until a full-fledged recovery is in place. On the week, the euro was up 0.4 percent and 0.6 percent firmer so far in August. The dollar slipped 0.1 percent to 98.68 yen after hitting a three-week high of 99.15 yen on the Reuters trading platform. Despite the pullback, the dollar is still heavily favored by investors over the yen this year. The gap between two-year U.S. Treasury yields and their counterpart in Japanese government bonds moved to the widest since March 2012 and should encourage more investors in Japan to buy U.S. Treasuries, analysts said. Sebastien Galy, currency strategist at Societe Generale in New York, said "there has been a tick-by-tick correlation between dollar/yen and U.S. bond yields, which has certainly supported that pair." On the week, the dollar rose 1.1 percent against the yen. So far this year, the dollar has gained 13.7 percent against the yen. The euro rose 0.1 percent to 131.97 yen, after touching a one-month high of 132.42. The dollar also fell against other currencies, down 0.2 percent at 0.9211 Swiss franc. The Australian dollar gained 0.3 percent to #0.9033.