* U.S. manufacturing sector grew in October -ISM
* Australian dollar up ahead of expected RBA rate hike
* U.S., euro zone and UK policy decisions later in week (Updates prices, adds quotes, details)
By Wanfeng Zhou
NEW YORK, Nov 2 (Reuters) - The dollar and yen declined on Monday as data showing more evidence of a worldwide economic recovery and rising stock prices eroded safe-haven demand for the U.S. and Japanese currencies.
U.S. data showed sharp improvements in manufacturing, construction and housing, encouraging investors to buy riskier assets with higher yields.
U.S. stock indexes rose, and gold and oil prices advanced, lifting commodity-linked currencies such as the Australian and Canadian dollars.
"I think we're clearly seeing some appetite for risk today," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. "The gains in U.S. equities in particular are seeing the dollar give up some ground."
For much of the past year, the dollar has had an inverse relationship with moves in the stock market, falling when good economic data and rising share prices boost risk appetite.
In midday trading, the euro rose 0.7 percent to $1.4821
after climbing as high as $1.4845
The dollar gained 0.4 percent to 90.50 yen
U.S. manufacturing activity rose to its highest level in 3-1/2 years last month, offering hope the budding economic recovery would be sustained. See [ID:nN02437173].
Other reports showed pending home sales, for homes under contract to be sold, unexpectedly surged in September and construction spending posted its largest gain in a year in September.
"All the numbers show stabilization and the start of some expansion. That's a continuation of what we've been seeing for the past couple of months," said Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware.
Earlier, surveys showed China's manufacturing sector grew at its fastest pace in 18 months in October and euro zone factory activity expanded, also boosting market sentiment. See [ID:nSP62642]
CENTRAL BANKS, G20
The ICE Futures U.S. dollar index, a measure of the greenback's value against a basket of six major currencies, fell 0.4 percent to 76.023 <.DXY>.
Investors remained cautious before a slew of events this week, including monetary policy decisions in the United States, the euro zone, Australia and the UK. The U.S. jobs report for October is due out on Friday, and Group of 20 finance officials will meet at the weekend.
"How this week evolves could have major implications for FX markets and the global economy, as investors and policy makers alike seek to establish their strategies for next year," UBS strategists wrote in a note.
Canadian Finance Minister Jim Flaherty said on Monday the G20 top developed and emerging economies will discuss foreign exchange rates. Other G20 sources said foreign exchange rates were not expected to be a major topic at the meeting, but may be discussed in relation to rebalancing the world economy. See [ID:nLQ516726].
The Australian dollar rose 0.9 percent to US$0.9071
Sterling slipped as traders braced for the possibility the Bank of England may announce an increase in its asset-buying program later in the week and a British government announcement of a banking sector overhaul.
The pound fell 0.3 percent to $1.6394