(Recasts; updates prices, adds quote, changes byline)
By Steven C. Johnson
NEW YORK, Aug 22 (Reuters) - The yen tumbled and high-yield currencies gained on Wednesday as firmer stock markets eased anxiety about tough lending conditions and left investors trimming recent bets on the Japanese currency.
The euro, meanwhile, rose against the dollar as markets revived their outlook for higher euro-zone interest rates after the European Central Bank said there had been no change to its monetary policy stance since its last meeting in early August.
That was when ECB President Jean Claude-Trichet hinted at a possible September rate hike by saying "strong vigilance" was needed to stem inflation risks.
In the United States, share prices rose, building on the week's steadying trend this week after being pounded in the prior few weeks.
That has renewed the appeal of higher-yielding currencies such as the Australian and New Zealand dollars and reduced the attractiveness of holding a low-yielding currency like the yen.
Reflecting improved sentiment on credit markets -- ground zero of a surge in volatility -- overall U.S. corporate bond spreads narrowed on Wednesday.
"There's some sentiment that the credit crunch has eased a bit, and global equities being relatively strong has encouraged renewed interest in carry trades," said Michael Malpede, senior currency strategist at Man Global Research in Chicago.
"But I don't think anyone's come to the conclusion that we're out of the woods. There are still a lot of people looking over their shoulders at this point."
Early afternoon in New York, the dollar was up nearly half a percent at 114.94 yen <JPY=>. It hit a 14-month low around 111.60 yen last week. The euro rose 1 percent to 155.54 yen <EURJPY=R>.
The high-yielding Australian and New Zealand dollars, seen as proxies for carry trade sentiment, each rose by more than 1 percent against the yen <AUDJPY=R> <NZDJPY=R>.
Expectations that the Bank of Japan would hold interest rates at 0.5 percent on Thursday also weighed on the yen, analysts said. A month ago, market participants expected a 25 basis point rate hike at the end of this BOJ policy meeting.
The euro rose 0.5 percent to $1.3533 <EUR=>.
A CALMING OF THE STORM
Markets began stabilizing on Tuesday when U.S. Senate Banking Committee Chairman Christopher Dodd said Fed Chairman Ben Bernanke told him the bank would use "all available tools" to stem fallout from a U.S. mortgage crisis that has threatened to dry up credit markets.
That has boosted the outlook for at least a quarter percentage point Fed rate cut either at or before the central bank's Sept. 18 policy meeting.
The median forecast in the Reuters poll of 63 economists released Wednesday had the Fed cutting rates by 25 basis points to 5 percent in September and by another quarter percentage point by year-end. See [ID:nL21836236]
To stimulate lending, the Fed last week slashed its discount lending rate at which banks can borrow from it directly, and Citigroup, Bank of America, Wachovia and JPMorgan Chase have said they've turned to it for funds in recent days.
Before Wednesday's ECB statement, markets had pared back bets on a September hike. In the Reuters poll, conducted before Wednesday's ECB statement, 34 of 65 economists said the ECB would leave rates on hold when it meets on Sept. 6.
But some traders warned that it may be premature to sound the "all clear" signal on risk-taking.
Personally, I don't think this crisis is over," said Firas Askari, managing director and head of foreign exchange trading at BMO Capital Markets in Toronto. "I would be very wary of carry trades. In fact, I'd rather be very late to the party than be among the first few ones in the door." (Additional reporting by Gertrude Chavez-Dreyfuss)