* Dollar hits 7-mo high vs yen; recovers ground vs euro * Japanese investors seen looking for returns abroad in Q2 * U.S. ISM index better than expected, boosts dollar (Updates prices, adds comment, data) By Gertrude Chavez-Dreyfuss and Steven C. Johnson NEW YORK, April 1 (Reuters) - The dollar climbed to a seven-month high against the yen on Thursday, bolstered by upbeat U.S. data and moves by Japan's investors to invest funds into higher-yielding currencies overseas to mark the start of its new fiscal year. Data showing the U.S. manufacturing sector expanded in March at its fastest pace in more than five years further boosted the greenback versus the yen and weighed on the euro. For a report on the Institute for Supply Management index click on [ID:nEAP100022]. "Definitely (the ISM) is a great number, better than expected and I expect some dollar strength," said Dan Cook, senior market analyst at IG Markets in Chicago. "The one negative was the small drop in employment. Not something you want to see in a week focused on employment." The U.S. payrolls report is due on Friday, with analysts forecasting the economy added 190,000 jobs last month. That would be an outcome that would likely lift the dollar and boost expectations for higher U.S. interest rates. Strong manufacturing data from Europe and Asia also boosted risk appetite and the view that recovery is taking hold in economies around the world. That, however, kept dollar gains in check against other major currencies, including the pound and Canadian dollar. "We had a slew of nice upside surprises from manufacturing data in China, Europe, the UK ... so that's a good start to the month and if we get a good payrolls number tomorrow, that's a dollar-positive," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. A spike in risk appetite also encouraged Japanese investors to sell the yen as the new fiscal year gets underway. The dollar rose as high as 94.04 yen JPY=, according to Reuters data, its best level since late August 2009. It was last at 93.89 yen, up 0.5 percent on the day. EURO UNDER PRESSURE VS STERLING, YEN The euro was slightly down at $1.3502 EUR=, as Wednesday's quarter-end buying faded and analysts continued to fret about a debt crisis in Greece. Traders brushed off a Bank of Japan survey showing a widely expected improvement in business sentiment during the March quarter. For details see [ID:nECONJP] Instead, investors appeared eager to put money into overseas currencies and assets that offer higher returns than those in Japan, where interest rates are seen staying low indefinitely. The euro also hit a two-month high at 126.62 yen EURJPY=. Sterling hit a five-week high against the euro of 89.04 pence EURGBP=D4, with traders citing an opinion poll showing the opposition Conservatives could gain a majority in the upcoming election, diminishing UK political uncertainty. The pound rose 0.4 percent to $1.5233 GBP=, while the dollar fell 0.5 percent to C$1.0099 CAD=. A strong Swiss purchasing managers' index boosted the franc to 1.4151 per euro EURCHF=R, its best showing since the euro was launched in 1999. [ID:nZAT010793]. The New Zealand dollar NZD=D4 fell 0.7 percent to US$0.7056 after the International Monetary Fund said the currency was overvalued and the government needed to cut costs and shrink debt. [ID:nN31245977] Optimism on the U.S. jobs picture was tempered slightly a day ago when a private report showed the economy unexpectedly shed 23,000 private-sector jobs last month. Omer Esiner, a senior analyst at Travelex Global Business Payments in Washington, said that pushed an index of the dollar against major currencies off 10-month highs seen last week. The dollar "is still well within familiar ranges," he said. "In fact, it's at the lower end of its recent ranges ahead of the jobs number. The support is coming from positioning ahead of this jobs data." (Additional reporting by Nick Olivari) (Editing by Theodore d'Afflisio)

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