* Dollar pressured as risk appetite warms
* Dollar index down 1.0 percent to low of 79.646
* Yen sold in non-dlr cross trades as investors seek yield
* Focus on U.S. Q1 GDP, UMich May consumer sentiment
(Adds quote, updates prices)
By Tamawa Desai
LONDON, May 29 (Reuters) - The dollar fell to a five-month low against a basket of currencies on Friday and the yen also dropped as signs the global recession may have passed its worst prompted investors to seek riskier assets.
With global share prices at year's high, investors were encouraged to dump the dollar, which they had hoarded during the worst of the global financial crisis last autumn.
"We're back to the pro-risk theme, as markets continue to anticipate growth to return in the second half of the year," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "That will cause the dollar to underperform."
Month-end fixings by corporations and pension funds also pushed the dollar lower, traders said.
By 0954 GMT, the dollar index, a gauge of the U.S. currency's performance against six major currencies, fell to 79.646, its lowest since late December.
It is now down some 5.8 percent for the month, on track for its biggest monthly fall since dropping more than 6 percent in December.
The index tumbled last week on concerns U.S. government debt may lose its top 'AAA' rating.
Those worries receded somewhat as a series of successful U.S. Treasuries auctions this week indicated healthy demand for U.S. debt. But the market remains jittery.
"The simultaneous bear steepening of the US yield curve and renewed dollar weakness is proof that investors are demanding a greater risk premium for holding U.S. assets," Barclays analysts said in a note.
South Korea's National Pension Service (NPS) said on Friday it would reduce exposure to U.S. government bonds and equities in its five-year portfolio, adding pressure on the dollar.
The NPS is expected to manage 432 trillion won ($343.7 billion) by the end of 2014, and U.S. government bonds account for 83 percent of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.
EURO AT YEAR'S HIGH
The euro rose to its highest level this year against the dollar at $1.4089.
Data on Friday showing euro zone consumer prices were flat in May for the first time prompted a slight dip in the euro, before it resumed its uptrend.
Traders will keep a close eye on U.S. first quarter GDP which is expected to show the economy contracted by 5.5 percent from 6.1 percent fall in a preliminary reading.
Separately, Reuters/University of Michigan survey of consumer sentiment is expected to show a reading of 68.0 compared with 65.1 in the final April report.
Sterling rose more than one percent to $1.6148, its highest since early November.
The dollar also hit an eight-month low against the Australian dollar and the New Zealand dollar.
The dollar fell 1.0 percent against the yen to 96.00 yen, due partly to selling by Japanese exporters, but was well above a two-month trough of 93.85 yen marked last week.
The yen was sold against most currencies apart from the dollar, as investors sought higher returns.
"We are in a transition phase for broader yen underperformance as global long-term yields rise," BTM-UJF's Hardman said. "The yen may become the funding currency of choice."
The yen fell to an eight-month low against the Australian dollar of 75.66 yen.
Nippon Life, Japan's biggest life insurer, said on Friday the allure of U.S. Treasuries had grown and they looked appealing for forex-hedged investors compared with Japanese government bonds -- the yield differential is now about 200 basis points.
(Editing by Toby Chopra)