The dollar and euro both gained against a weaker yen Monday as positive news for the U.S. financial sector boosted appetite for stocks and other riskier trades and helped underpin high-yielding currencies like the New Zealand dollar.
Hopes that a possible rescue plan for troubled Ambac Financial Group , the second largest U.S. bond insurer, would help limit the damage from the ongoing credit crisis bolstered investor confidence.
Dresdner Bank, part of insurer Alliance, intends to support a rescue package for Ambac, the bank said Monday.
"Overnight markets were once again dominated by an ongoing increase in risk appetite," said Christian Lawrence, strategist at RBC Capital Markets in London in a research note to clients.
"During the week ahead, initial focus in the U.S. will be on the fate of the monolines and any confirmation of the bailout news that turned market sentiment around so sharply on Friday."
Ambac, known as a monoline insurer that insures municipal bonds as well as other forms of debt, is facing billions of dollars of expected losses from guaranteeing repackaged subprime mortgages. A rescue plan may be announced on Monday or Tuesday, a person familiar with the matter told Reuters.
The worry is that a ratings downgrade for Ambac would force investors to sell billions of dollars of securities and lift borrowing costs for consumers and U.S. city governments, adding further strain to an already slowing U.S. economy.
Early morning in New York, the dollar was up against the Japanese currency, while the euro rose to a six-week high of 159.92 yen before trimming gains slightly.
The euro eased against the dollar, taking a breather after hitting a three-week peak of about $1.4862 on Friday.
High Yielders Buoyed
Stocks around the world have gained on hopes of the Ambac bailout with Japan's Nikkei closing at a six-week high.
High-yielding currencies tend to benefit in such an environment as investors favor riskier carry trades, where low-yielding units like the yen are sold to fund purchases of higher-yielding and riskier assets.
The New Zealand dollar, which has the highest interest rates among industrialized countries at 8.25 percent, approached levels not seen since it was floated 23 years ago.
The Kiwi dollar hit a high near $0.8099 before slipping to be little changed against the greenback. It advanced against the yen .
Sterling climbed versus the yen but eased against the dollar , hampered by a fall in British annual house price inflation to a 22-month low, which backed the case for more growth-boosting interest rate cuts .
On the data front, the focus will be on U.S. January existing home sales data due at 10 am New York time, where a weaker-than-expected outcome could pressure the dollar.
Economists surveyed by Reuters expect sales to have declined to a 4.8 million annualized rate, down from 4.89 million units in December.
With relatively little on the European data front, investors will look to comments from European Central Bank President Jean-Claude Trichet who is speaking at 2 pm London time.
"Given the sensitivity of the ECB to inflation, expect hawkish rhetoric that would undermine hopes of an early ECB rate cut and thereby provide short-term support for the EUR," said analysts at BNP Paribas Corporate and Investment Banking in a report.