Dollar gains vs yen on increased risk appetite

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 on 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 0.5 percent against the Japanese currency at 107.72 yen, while the euro rose to a six-week high of 159.92 yen before trimming gains to 159.62, up 0.4 percent.

The euro eased 0.1 percent to $1.4815, 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 .N225 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.