FOREX-Optimism, month-end flows boost dollar vs yen

* Dollar boosted by month-end flows in thin trading

* U.S. weekly jobless claims decrease in the latest week

* Chrysler files for bankruptcy protection

* U.S. data suggests economy will recover later this year

(Recasts, updates prices, adds details; changes byline)

By Steven C. Johnson

NEW YORK, April 30 (Reuters) - The dollar neared a two-week high against the yen and rose against the euro on Thursday as investors rebalanced their portfolios as April ended and trading thinned heading into the May Day holiday in Europe.

Better-than-expected corporate earnings, which helped put the benchmark S&P 500 on track for its best month since 1991, boosted market optimism, lifting higher-yield currencies such as the euro and Australian dollar against the yen.

The U.S. dollar fell against its Canadian and Australian counterparts as safe-haven flows dried up a day after the Federal Reserve said the economy's decline was slowing.

But investors began taking profits after an overnight euro rally stalled near $1.34, helping to spark a short-covering rally in the greenback.

"Technicals have been trumping sentiment, and sentiment has been trumping economic fundamentals," said Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon.

RBC Capital Markets strategist Matthew Strauss, however, said trading activity was unusually thin, with much of Europe and Japan heading out for holidays, adding the market would have to wait until next week for more direction.

The dollar rose 1.2 percent to 98.68 yen JPY= while the euro rose 1.2 percent to 130.66 yen EURJPY=. The Bank of Japan lowered its economic forecast overnight and now sees the Japanese economy shrinking some 3.1 percent in fiscal year 2009, down from an earlier estimate of 2 percent.

The euro fell 0.2 percent to $1.3241 EUR= after rising as high as $1.3384 in earlier trade, while sterling rose 0.3 percent to $1.4816 GBP=. The U.S. dollar shed 0.8 percent against the Canadian dollar to C$1.1940 CAD=.

U.S. automaker Chrysler's filing for bankruptcy protection on Thursday had limited impact on the currency market, though Woolfolk said it was a marginal positive for risk appetite.

"Restructuring for Chrysler and, for that matter, GM, is requisite to retain many thousands of jobs in the auto sector and avoid a worst-case scenario," he said. "In a severe recession, a collapse of the auto industry is not an option."

Chris Gaffney, vice president of markets at Everbank World Markets in St. Louis, said the euro also was hamstrung by uncertainty about next week's European Central Bank meeting and whether officials will follow the Fed and others and start buying securities to increase credit and stimulate growth.

"If they do that, I think it would put some real pressure on the euro," he said.

A rise in euro zone unemployment to 8.9 percent in March from an upwardly revised 8.7 percent in February underlined the view that the euro zone economy remains weak. Other data showed that euro zone inflation remained at a record low of 0.6 percent year-on-year in April.

Separate data showed U.S. weekly jobless claims decreased in the latest period even as continued claims notched a fresh record high. Some investors took that as a sign of stabilization in the labor market.

"The longer we have stability -- no matter what level you have stability at -- if you have stability, that's the precursor to recovery," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

(Additional reporting by Nick Olivari) (Editing by Theodore d'Afflisio)