Asia stocks extend rally

By Eric Burroughs

HONG KONG (Reuters) - Asia stocks rose to their best level in two months on Tuesday and higher-yielding currencies jumped against the yen as Washington's plan to relieve banks of toxic debt spurred investors to pick up riskier assets.

The gains in major Asian equity markets followed a 7 percent surge in the U.S. S&P 500 .SPX after a surprise rise in home sales, spurring hopes that a recovery is taking hold in the battered housing market at the heart of the global credit crisis.

Financial shares extended their rally after investors cheered the U.S. Treasury's plan to free banks of up to $1 trillion (680 billion pounds) in troubled mortgage securities and other loans, part of the array of measures designed to jump start lending and the economy.

Oil prices dipped 15 cents to $53.65 a barrel after reaching a four-month high the previous day.

The revival in risk-taking boosted currencies such as the Australian and New Zealand dollars against the yen as carry trades -- borrowing in low-yielding currencies and buying higher-yielding ones -- showed signs of making a comeback.

As financial markets have stabilised, gauges of volatility have dropped and made carry trades seem more appealing.

"The long-awaited U.S. programme is finally out, and that is significant enough to bring some stability to the market," said Minoru Shioiri, chief manager of currency trading at Mitsubishi UFJ Securities in Tokyo. "That means the market is likely to have a bias for a weaker yen."

The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 1.4 percent, taking gains to 28 percent from the five-year low hit last November.