(Recasts, changes byline, updates prices)
By Toni Vorobyova
LONDON, Oct 15 (Reuters) - The yen hit its lowest levels in around two months against both the euro and the dollar on Monday, as risk-seeking investors took advantage of cheap Japanese borrowing costs to fund purchases of high-return assets.
Analysts said risk appetite was in part boosted by a report that major banks, including Citigroup, were considering a $80 billion fund to buy ailing mortgage securities to limit damage from the credit crunch [ID:nL14680448].
The dollar, which has recently come under pressure at times of risk appetite, weakened against the euro <EUR=> and also against a basket of six major currencies (.DXY: Quote, Profile, Research).
With no first tier data due on Monday, investors were focussed on a scheduled speech by Federal Reserve Chairman Ben Bernanke on the economic outlook at 2300 GMT for a steer on the likely timing and number of future U.S. rate cuts.
"Across the board we've seen a return of risk appetite, and the euro seems to be benefiting from that," said Daragh Maher, senior currency strategist at Calyon.
"Critically, what Bernanke says this evening will shape sentiment... Markets are more or less priced for one more rate cut by year-end and I think Bernanke will be comfortable enough that they retain that kind of view."
The dollar had hit a peak of 117.82, its highest since mid August <JPY=>. But it was down 0.45 percent against the euro at $1.4239 <EUR=> by 1026 GMT, closing in on record highs above $1.4280 set two weeks ago.
Traders said the break through stop loss levels around $1.4200-10 levels had accelerated the rise in euro/dollar.
The euro was up half a percent against the yen to 167.64 yen according to Reuters data <EURJPY=>, its highest since July 23.
The dollar index fell 0.3 percent to 77.955 (.DXY: Quote, Profile, Research), moving towards an Oct. 1 record trough of 77.660.
Maher at Calyon said that talk of a banks' mortgage fund was mixed news for the dollar.
On the one side it potentially limits the negative impact of the credit crunch on the U.S. economy but on the other side it boosts risk appetite which has been negatively correlated with the dollar in recent weeks, he said.
Adam Cole, global head of FX currency strategy at RBC Capital Markets, said financial companies reporting results this week could also have an impact on the dollar.
"Q3 earnings season is important as financials are reporting and if there are negative surprises this could have knock-on effects for the dollar," he said.
Citigroup is among those reporting on Monday.
Market players are cautious about making active bets on currencies ahead of the G7 meeting later this week.
Amid the focus on the G7, European Central Bank President Jean-Claude Trichet told television station CNBC Europe that currency traders speculating on the yen and currencies in emerging markets should be aware of the risks they are taking.