* Dollar pressured as risk appetite warms
* Dollar index down over 1 percent to low of 79.421
* 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 Kirsten Donovan
LONDON, May 29 (Reuters) - The dollar hit five-month lows
against a basket of currencies on Friday and the yen also
dropped as investors sought higher-yielding and riskier assets,
believing the worst of the global recession may have passed.
World stocks posted new 2009 highs, encouraging investors to
dump the greenback, which they had hoarded due to its liquidity
and safe-haven benefits during the worst of the global financial
crisis last autumn.
"It's driven by equities looking stronger and as a result of
that the dollar is losing momentum... people are buying into the
'worst is behind us' story," said Audrey Childe-Freeman, senior
FX strategist at Brown Brothers Harriman.
Month-end fixings by corporations and pension funds also
pushed the dollar lower, traders said.
By 1135 GMT, the dollar index, a gauge of the U.S.
currency's performance against six major currencies, fell 1.3
percent to 79.513, having earlier hit 79.421, its lowest since
mid December.
It is now down some 6.3 percent for the month, on track for
its biggest monthly fall since 1985.
The index tumbled last week on concerns U.S. government debt
may lose its top triple-A rating as a result of the rising debt
levels needed to fix the economy and rehabilitate the financial
sector.
Those worries, though still at the back of investors' minds,
receded somewhat after Moody's Investors Service affirmed the
country's credit rating and the market took down over $100
billion of U.S. Treasury issuance this week as longer-dated
yields soared.
"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.
Adding to pressure on the dollar, 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.
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 struck its highest level this year against the
dollar at $1.4134 <EUR=> after a brief dip after data showed
euro zone consumer prices were flat in May for the first time,
raising the risk of deflation.
Sterling meanwhile, rose more than one percent to $1.6182
<GBP=>, its highest since early November.
The dollar also hit an eight-month low against the
Australian dollar and the New Zealand dollar as investors sought
out higher-yielding assets.
The dollar fell 1.2 percent to 95.77 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 favoured the high-yielders.
"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.
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.
(Additional reporting by Tamawa Desai; Editing by Andy Bruce)
