* Dollar, euro hit two-week highs vs yen
* Euro/dollar up as risk appetite rises
* U.S. consumer confidence also positive for risk-taking
* U.S. ISM manufacturing shrinks at slower pace (Recasts, updates prices, adds comment, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, May 1 (Reuters) - The U.S. dollar and yen fell on Friday as improving risk appetite sparked by better-than-expected U.S. economic data pared demand for both currencies as a refuge against a global slowdown.
The dollar fell for a fourth straight session versus the euro, while the yen dropped to a two-week low against both the euro and dollar, with volumes thin given the May Day holiday in Europe. Higher-yielding currencies such as the Australian and New Zealand dollars were also some of the biggest movers on the day, moving in tandem with higher U.S. stocks.
Reports on Friday reinforced the view that the worst of the recession may have passed, making investors more comfortable with risk-taking. Data showed U.S. consumers felt more upbeat about the economy in April, while a closely watched gauge of manufacturing suggested the sector was gradually emerging out recession. For story see [ID:nN01402214].
The numbers were consistent with the Federal Reserve's less bleak outlook on the U.S. economy on Wednesday.
"Risk appetite is definitely coming back and the data this morning was phenomenal," said Melvin Harris, a market analyst at Advanced Currency Markets in New York.
"The reports are supportive factors to truly build the case that while things are not completely better yet, we are moving in a positive direction. Economic fundamentals will become more important in the next couple of months."
In early afternoon trading, the euro rose 0.3 percent against the dollar to $1.3258 <EUR=> and touched a two-week high against the yen at 132.33 yen <EURJPY=R>. The euro last traded at 131.90, up 1.2 percent from late on Thursday.
The ICE Futures' dollar index, a measure of the greenback's value versus six major currencies, fell 0.3 percent to 84.591 .DXY.
The dollar, however, gained 0.9 percent against the yen to 99.46 <JPY=>, having hit a two-week high around 99.58 yen, according to Reuters data.
The Australian dollar rose 0.7 percent against the U.S. dollar to US$0.7304 <AUD=>. The New Zealand dollar also climbed 0.8 percent against the greenback to US$0.5693 <NZD=>, while the Canadian dollar was also firmer, with the U.S. dollar down 0.7 percent at C$1.1850 <CAD=>.
Investors were also encouraged by data overnight showing Chinese manufacturing gained further momentum in April, as well as by Friday's better-than-expected UK manufacturing survey. [ID:nPEK279290] and [ID:nLU86907]
"The antipodean currencies are amongst the top performers bolstered in part by encouraging PMI data out of China and in part by relatively high yields as market participants place money in (those) currencies over the holiday period," said Brown Brothers Harriman in a note to clients.
Optimism was further stoked in the United States after St. Louis Fed President James Bullard said on Friday unemployment rates in the United States will likely crest above 9 percent, but not reach levels set in the early 1980s. [ID:nWAT011387] (Additional reporting by Nick Olivari; Editing by James Dalgleish)