* Dollar rises vs yen on U.S. ISM manufacturing data
* Dollar index close to 6-month high
* Euro gains but outlook still negative (Recasts, updates prices, adds comment, adds byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 1 (Reuters) - The dollar rose against the yen on Monday, while higher-yielding currencies such as the Australian and New Zealand dollars also gained as data showing growth in manufacturing around the world spurred further optimism about the global economic recovery.
The euro firmed, snapping four straight days of declines and rising in line with higher stocks as risk appetite increased amid the market's upbeat sentiment on growth. Over the past year, the euro has become a proxy for risk appetite among developed currencies.
Optimism about the economy was further fueled after data showing U.S. factory activity rose to a 5-1/2-year high in January, according to an index of the Institute for Supply Management. [ID:nN01363414]
In Europe, the euro zone manufacturing sector grew at its fastest pace in two years last month, according to the Markit Eurozone Manufacturing Purchasing Managers' Index. [ID:nLAG006081]
"The U.S. data certainly bodes well for the manufacturing sector going into the first quarter and that's supportive of dollar/yen," said Dean Popplewell, chief currency strategist, at FX brokerage firm OANDA in Toronto.
In early afternoon trading, the dollar was up 0.5 percent
The euro traded up 0.4 percent at $1.3922
Traders said the next downside level to watch was $1.3850, where a large option barrier was said to reside.
OANDA's Popplewell said the outlook on the euro remains negative despite Monday's gains. Greece's fiscal woes remained on the forefront of investors' minds and the big question in the near term is whether euzo zone monetary authorities would bail out the troubled country.
"Overall, the dollar is basically just giving up ground versus the euro because the general consensus is that its gains last Friday were overdone." Popplewell sees the dollar resuming its uptrend in the next few days.
The single currency remained near seven-month lows on concerns over the debt of some euro zone countries. Analysts said the euro remained vulnerable as concern persisted about the debt levels of Greece and Portugal.
The European Union's Economic and Monetary Affairs commissioner, Joaquin Almunia, said in a Reuters interview that Greece's fiscal cutback plans were "ambitious but achievable." [ID:nBFA001042]
The dollar index, a calculated measure of the greenback's performance against six other major currencies, was down 0.3 percent at 79.242, off an earlier high of 79.534 <.DXY>, its strongest since late July.
Earlier in the session, the Australian dollar fell to its lowest level since mid-December versus the dollar and the yen as investors unwound yen-funded carry trades on a newspaper report citing Adair Turner, chairman of Britain's Financial Services Authority, saying such trades were "economically valueless." [ID:nLDE60S2G5]
Turner was speaking after a private session on casino banking and regulation at the World Economic Forum in Davos.
The Australian dollar later recovered and
The Reserve Bank of Australia is expected to raise interest rates by 25 basis points on Tuesday. A Reuters poll showed all 20 economists surveyed predict a hike [AU/INT]. Markets price in a 69 percent perceived chance of an increase.
The New Zealand dollar also rose to US$0.7080
(Additional reporting by Nick Olivari; Editing by Chizu Nomiyama)