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LONDON, May 31 (Reuters) The yen rose against the euro and the dollar on Wednesday after the Chinese central bank reaffirmed its commitment to deepen foreign exchange reform and boost the flexibility of its currency.

The yen is commonly traded as a proxy for the Chinese yuan and investors reckon greater flexibility in China's currency regime could lead to other countries in Asia -- including Japan -- also allowing greater foreign exchange moves.

The dollar had earlier been under pressure after falling sharply on Tuesday as the nomination of a top Wall Street banker as Treasury chief did little to dispel suspicions that Washington wants a weaker dollar.

The currency failed to sustain a brief rise on Tuesday after U.S. President George W. Bush named Goldman Sachs Chairman Henry Paulson to succeed John Snow as Treasury Secretary. It posted its biggest one-day loss against a basket of currencies since early January.

''The market is thinking that Paulson may not really fight the declining dollar, so that's putting the dollar under pressure.

And China adds to the sentiment which is starting to be a little bit dollar-bearish,'' said Antje Praefcke, currency strategist at Commerzbank Corporates and Markets in Frankfurt.

''Already the fact that they (China) again stressed that they want greater flexibility and possibly let the yuan appreciate further, the market jumps on that,'' she added.'' By 0726 GMT the dollar was down 0.4 percent at 111.62 yen, whilst the euro was a third of a percent lower at 143.89 yen.

In its monetary policy report for the first quarter of this year, the People's Bank of China said it would press ahead with making the yuan fully convertible.

DATA DUE The dollar was also down 0.2 percent against the euro at $1.2895, with technical analysts saying a break above $1.29 could clear the way for a return to one-year highs of around $1.2970 hit in mid-May.

On the back of a broad move lower in the U.S. currency, the Canadian dollar hit a 28-year high against the greenback at C$1.0938.

Euro zone data was mixed, with German retail sales rising more than forecast on the month in April, but French consumer confidence unexpectedly falling in May.

Euro zone flash inflation and the European Commission's sentiment survey for May are due at 0900 GMT.

Stronger than expected readings could reignite speculation that the European Central Bank may hike rates by 50 basis points rather than just 25 basis points next week.

In the United States, the Chicago PMI for May is due at 1400 GMT, followed by minutes from the Federal Reserve's May meeting at 1800 GMT, which will be scrutinised for clues on whether the Fed is going to hike rates to 5.25 percent in June or stay pat.

Many investors say the Fed, which has raised rates at 16 straight policy meetings since mid-2004, is in a difficult position as it needs to weigh the potential for higher inflation and concerns about a slowdown in the housing sector.

DESIRE FOR WEAKER DOLLAR? On Tuesday, the dollar initially rose on the announcement that Paulson will replace Snow, as Treasury chiefs from Wall Street in the past have tended to favour a stronger dollar, possibly to attract foreign funds to the U.S. capital markets.

But traders said the dollar would remain vulnerable to the perception -- sparked after the Group of Seven finance ministers met last month -- that Washington wants to see the dollar gradually fall to reduce the huge U.S. current account deficit.

''We maintain our bearish mid- to long-term view on the dollar as Paulson is unlikely to change the current U.S. stance of calling for more appreciation in Asian currencies,'' said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank in Tokyo.

Although current Treasury chief Snow has repeatedly said he supports a strong dollar, his remarks have fallen on deaf ears as many in the market suspect he favours a weaker currency to support U.S. export industries.

REUTERS CS DS1535