* U.S. factory activity rises, jobless claims up
* Shanghai stock index up 4.5 pct
* Traders cautious in holiday-thinned markets (Updates prices, adds data, comment)
By Steven C. Johnson
NEW YORK, Aug 20 (Reuters) - The dollar rose against the yen on Thursday in thin trade as data showing an advance in U.S. mid-Atlantic factory activity this month boosted recovery hopes and reduced safe-haven demand for the Japanese currency.
A rebound in Chinese stocks also lifted spirits, though a an increase in the number of Americans filing for first-time jobless benefits in the latest week kept investors cautious, capping euro gains against the dollar.
Over the last year, the low-yielding dollar and yen have tended to fall when markets grow more optimistic and as investors buy higher-yielding assets and currencies.
That relationship has started to weaken, though, and analysts said investors appear unwilling to extend already large positions against the U.S. currency, especially as uncertainty about the U.S. economic outlook persists.
"We'll have a recovery but it's going to take a while to gain traction," said Meg Browne, senior currency strategist at Brown Brothers Harriman in New York. "U.S. interest rates will stay low for a while yet, and so now you're seeing a lot of positioning because there's not a lot to trade on."
For more on the U.S. data, see [ID:nN20510281 and nN19479439]
The dollar rose to 94.33 yen
Sterling was down 0.4 percent at $1.6475
The Norwegian crown rose, hitting its highest level against
the euro
Traders remained cautious, though, and the rise in U.S. jobless claims only added to concerns that the strongest data has so far come from the manufacturing sector, which comprises a small slice of the U.S. economy.
"For a real recovery, we need the consumer to be in the game, but with rising unemployment, the consumer is not going to be out there spending," said Kurt Karl, chief U.S. economist at Swiss Re in New York.
He said the jobless claims report "is indicative that this is definitely not going to be a V-shaped recovery."
U.S. and European stocks rose, following a 4.5 percent surge in the Shanghai Composite Index <.SSEC>, which shed nearly the same amount the previous day.
Market participants have been focusing on the Shanghai index, which in the two weeks to Wednesday had shed nearly 20 percent, rattling confidence in a global recovery.
"It is an understandable reaction as Chinese equities have acted as a good leading indicator for broader market dynamics over the past year," Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ wrote in a research note to clients.
But he said perceptions that China's economic recovery is essential to global recovery may be overdone, adding that world stock gains owe more to the flood of money central banks have pumped into their economies than from China's outlook. (Additional reporting by Vivianne Rodrigues in New York and Naomi Tajitsu in London; Editing by Dan Grebler)