(Adds details, byline, updates prices)
By Lucia Mutikani
NEW YORK, Feb 25 (Reuters) - The yen fell broadly on Monday
as euphoria over the U.S. bond insurance sector boosted the
appeal of stocks and other risky assets, helping to underpin
high-yielding currencies like the New Zealand dollar.
Standard & Poor's said it had removed MBIA Corp's <MBI.N>
top "AAA" rating from credit watch negative, but added the
outlook was negative, suggesting that a rating downgrade
remained likely over the next two years.
That announcement came on the heels of news of a possible
rescue plan for troubled Ambac Financial Group <ABK.N>, the
second-largest U.S. bond insurer. Such a step would help limit
the damage from the ongoing credit crisis that has fractured
investor confidence.
Dresdner Bank, part of insurer Alliance <ALVG.DE>, on
Monday said it intends to support a rescue package for Ambac.
"The market came back after the weekend in a more
risk-seeking mode. It's just a reflection of the market being
more comfortable with risk at the moment and the yen is
suffering as a consequence," said Shaun Osborne, currency
strategist at TD Securities in Toronto.
The dollar raced to a session high of 108.21 yen <JPY=>
before retreating in late trade to around 108.06 yen, still up
0.8 percent on the day. The euro jumped to a five-week high of
160.41 <EURJPY=> and last traded up 0.7 percent at 160.19 yen.
The euro was little changed at $1.4824 <EUR=>, taking a
breather after hitting a three-week peak of about $1.4862 on
Friday.
Global stocks have gained on hopes of the Ambac bailout,
with Japan's Nikkei index <> closing at a six-week high.
Ambac, which insures municipal bonds as well as other forms
of debt, is facing billions of dollars of expected losses from
guaranteeing repackaged risky subprime mortgages.
CARRY TRADES BACK IN FASHION
A bailout could see Ambac avoiding a ratings downgrade that
would force investors to sell billions of dollars' worth of
securities, which would lift borrowing costs for consumers and
U.S. city governments and further strain an already slowing
economy.
The New Zealand dollar <NZD=>, which has the highest
interest rates among industrialized countries at 8.25 percent,
rose to levels not seen since it was floated 23 years ago.
The kiwi hit a high near $0.8114, according to Reuters
data, before slipping to trade little changed at $0.8091. It
advanced 0.7 percent against the yen to 87.35 yen <NZDJPY=R>.
The Canadian dollar was also a big winner on the day. The
U.S. dollar fell 1.6 percent to C$0.9952 <CAD=>. Against the
yen, the Canadian dollar rose 1.3 percent to 107.41 yen
<CADJPY=>.
The Australian dollar <AUDJPY=R> and sterling <GBPJPY=>
also posted gains against the Japanese currency. The Australian
dollar rose 0.9 percent to 100.04 yen, while sterling climbed
0.5 percent to 212.50 yen.
The yen often suffers in times of rising risk appetite
because investors borrow it at low Japanese interest rates to
fund "carry trades" that invest in higher-yielding currencies
and assets.
"Carry trades continue to swing back into fashion as equity
markets are performing well," said Michael Woolfolk, currency
strategist at Bank of New York Mellon in New York.
"Risk aversion has subsided and appetite among investors to
borrow in yen and invest in risky high-return investments such
as emerging markets, equities and commodities is back in
play."
On Tuesday, investors will watch the German Ifo survey for
February for fresh clues on the health of the euro zone economy
and the interest rate outlook.
"There might be a small upward surprise, but it's not going
to alter the broader outlook for the German economy," said TD
Securities' Osborne.
"The underlying impression remains that the euro zone
economy is slowing down ... At some point we could see interest
rates in the euro zone decline."
U.S. January producer price inflation data will also be
released on Tuesday and Federal Reserve Vice Chairman Donald
Kohn is due to speak on the domestic economy and monetary
policy.
(Additional reporting by Nick Olivari; Editing by James
Dalgleish)
