A couple of washes with soapnuts softens them up a lot. Washing in white vinegar as a softener helps too.
<whispers> tumble drying makes em very soft.
Yup - go for it with the dyeing. If you go for a bright pink rather than a baby pink it will cover the rainbows better. You will need a few packs of machine dye to get the lot done though - you can do about 8 nappies per machine pack.