* Yen falls broadly, hits 2-wk low vs euro, dollar
* Dlr also dips as increased confidence boosts risk demand
* Solid Chinese data supports belief in economic recovery
* U.S. ISM manufacturing data due at 1400 GMT
(Updates prices; changes byline, dateline; previous SYDNEY)
By Jessica Mortimer
LONDON, May 1 (Reuters) - The yen fell to two-week lows against the dollar and the euro on Friday as greater confidence that the global economy is now over the worst of the recession boosted investor appetite for riskier assets.
The dollar was also broadly weaker as market participants opted to buy currencies such as the euro and the higher-yielding Australian dollar against the U.S. currency and the yen, which typically gain when markets are averse to risk.
Trading was thin, however, with European markets closed due to the May Day holiday.
Risk appetite has been boosted by recent global economic data that has hinted that the worst of the recession may be over and a note of optimism from the U.S. Federal Reserve earlier this week.
Encouraging U.S. jobless claims figures on Thursday added to a burgeoning sense of optimism, while investors were particularly encouraged by a report showing that Chinese manufacturing activity gained further momentum in April.
"The recovery story remains," BNP Paribas currency strategist Ian Stannard said.
"The Chinese PMI data showed a further rebound and this has given more support to commodity currencies (such as the Australian and Canadian dollars) and put the yen under more pressure," he said.
The yen remains popular as a funding currency, used to buy higher-yielding assets like the Aussie dollar.
At 0800 GMT, the euro rose 1.2 percent against the yen to 131.87 yen, just shy of an earlier two-week high around 131.98 yen, while the dollar hit a two-week high around 99.35 yen, up 0.7 percent on the day.
The euro rose 0.4 percent against the dollar to $1.3280, helping to push the dollar's trade-weighted index down 0.3 percent to 84.592.
"Risk appetite is growing more and more. As a result the yen is being sold broadly," said Toru Umemoto, chief FX strategist Japan at Barclays Capital in Tokyo.
"Investors are seeking a growth gap and a rate gap and as a result the yen is a funding currency."
Among higher yielding currencies -- which are also seen as higher risk -- the Australian dollar rose 0.7 percent against the dollar to $0.7302 and by 1.4 percent against the yen, hitting a two-week high around 72.58 yen.
The Canadian dollar was also firmer, with the U.S. dollar down 0.4 percent at C$1.1886.
Analysts also said that data showing a drop in Japanese core consumer prices, putting the country in its second round of deflation in less than two years, while the jobless rate hit a 4-year high, also encouraged yen selling.
ISM DATA AWAITED
The U.S. ISM report on manufacturing is due at 1400 GMT and is expected to mark an improvement after economic reports showed that business activity in the U.S. Midwest contracted at a much less severe rate in April.
"Any signs that data is better or in line with expectations could lift risk appetite and high-yielding currencies like the Aussie and the kiwi," said Jonathan Cavenagh, a currency strategist at Westpac in Sydney.
A purchasing managers' survey on the UK manufacturing sector is also awaited at 0828 GMT, along with Bank of England lending figures.
Despite the upturn in risk appetite, however, investors remain cautious given a number of factors that continue to lurk in the background.
Sentiment remains vulnerable to any news that may hint at a flu pandemic that would be severe enough to dent the global economic recovery as Mexico began shutting down parts of its economy to slow the spread of the virus..
Investors were also cautious after news that U.S. automaker Chrysler filed for bankruptcy on Thursday and ahead of next week's release of the rehsults of U.S. stress tests on banks.
A source familiar with administration talks said the stress tests announcement -- originally scheduled for Monday -- had been pushed back, possibly to May 6, and that officials are leaning towards results of individual banks rather than summary results.
(Reporting by Jessica Mortimer; Additional reporting by Elaine Lies in Tokyo and Anirban Nag in Sydney; editing by Stephen Nisbet)