(Recasts, changes byline, adds quotes and comment)
By Jamie McGeever
LONDON, Aug 23 (Reuters) - A surge in investors' appetite for higher-yielding currencies and assets pushed the yen towards its biggest daily and weekly losses against several currencies for years on Thursday.
A growing sense of calm and confidence returning to troubled financial markets this week was also reflected in the broad gains across global equity markets and falling government bond prices.
The Bank of Japan left interest rates unchanged at 0.5 percent, easily the lowest in the industrialised world, and the European Central Bank injected 40 billion euros of funds via a three-month money market operation.
This followed news overnight that Bank of America Corp (BAC.N: Quote, Profile, Research) would invest $2 billion in beleagured Countrywide Financial Corp (CFC.N: Quote, Profile, Research), the largest U.S. mortgage lender.
And traders appear to have taken comfort from the meeting earlier in the week between U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, as well as the Fed's decision last week to lower its discount rate.
"It all seems to have contributed to stabilizing concerns in the markets and that has added to appetite for selling the yen," said Derek Halpenny, senior currency economist at BTM-UFJ.
At 1030 GMT the dollar was up 1.4 percent on the day against the yen at 116.90 yen <JPY=> and the euro was up 1.7 percent to 158.81 yen <EURJPY=>.
The higher-yielding New Zealand and Australian dollars were both up more than 2.5 percent versus the yen at 83.70 yen <NZDJPY=R> and 95.75 yen <AUDJPY=R>.
These two currencies were also up over 1 percent against the U.S. dollar at $0.7163 <NZD=> and $0.8190 <AUD=>.
Sterling jumped 0.7 percent to move back above $2.00 for the first time on over a week, while the euro rose 0.3 percent to $1.3585 <EUR=>.
CARRY IS KING...BUT FOR HOW LONG?
Having rallied so sharply late last week as fears of a credit crunch and short-term liquidity drying up prompted a deep unwinding of the carry trade, the yen's selloff on Thursday is equally impressive, according to Reuters charts.
At current spot market levels, the dollar is on track for its biggest one-day rise against the yen in over three years, the euro its biggest weekly rise against the Japanese currency in over six years, and the Australian and New Zealand dollars their biggest weekly jump in around 12 years.
"Everyone wants carry today," said one yen trader.
But analysts said the move to increased appetite may be short-lived.
If anything, the fertile conditions for carry trades, where low-yielding currencies are sold for higher-yielding units, may be deteriorating.
Currency market volatility has fallen from last week's abnormally high levels but is unlikely to return to the ultra-low levels of recent years.
And the fallout from the recent financial market turmoil is likely to have a negative impact on growth in the coming months, potentially leading to lower U.S. interest rates.
"There is little reason to believe financial markets are out of the woods just yet. Certainly, the flow of adverse news has not yet run dry, and indeed, far from it," said Bank of New York Mellon in a note to clients.
Meanwhile, analysts are still mulling the European Central Bank's statement on Wednesday, where it reminded markets of the policy stance agreed by its rate-setting Governing Council on Aug. 2, a move some viewed as a signal that it was still likely to raise interest rates at its Sept. 6 meeting.