* Dollar gains powered by rally vs yen
* Japanese demand for overseas assets sends yen tumbling
* Moody's U.S. rating affirmation supports dollar
* Focus on latest U.S. Treasury auction later Thursday
(Recasts, adds quotes and context, updates prices, changes byline and dateline. Previous: TOKYO)
By Jamie McGeever
LONDON, May 28 (Reuters) - The dollar rose broadly on Thursday, led by strong gains against the yen as rising U.S. bond yields and Moody's affirming its top credit rating on the United States drew Japanese investors into overseas assets.
Yields on 10-year U.S. government bonds have jumped more than 50 basis points in the last two weeks, triggered by mortgage-related hedging which has forced Japanese investors to adjust their positions too, traders said.
The recent sharp rise in yields has come despite strong demand at the two Treasury auctions this week -- notably from foreign investors -- which has soothed some concern over the long-term U.S. sovereign credit ratings outlook and supported the dollar.
The yen slid sharply across the board, notably against the New Zealand dollar after ratings agency Standard & Poor's revised up its outlook for New Zealand following that country's annual budget.
"The dollar is still quite strong. Moody's decided to maintain its rating on the U.S., and this was good for the dollar. Then S&P revised up its rating on New Zealand," said Carole Laulhere, currency strategist at Societe Generale in Paris.
Moody's Investors Services affirmed its top rating for the world's largest economy on Wednesday, but warned that if the U.S. failed to reduce debt levels once the economy returned to growth then its top grade could come under pressure.
At 0745 GMT the dollar was 0.3 percent higher against a basket of six major currencies at 81.00, but still within sight of a five-month low set on Friday just below 80.00.
The dollar was up 1.5 percent against the yen at 96.75 yen, pulling away from a two-month low of 93.85 yen hit last week and briefly scaling 97 yen for the first time in more than two weeks.
The New Zealand dollar rose 2.4 percent to 60.00 yen, and the euro was up 1.7 percent at 134 yen.
The euro touched a one-week low of $1.3793 earlier on Thursday but at 0745 GMT was up a slender 0.1 percent on the day at $1.3850.
US YIELDS
Analysts and traders said much of the Japanese currency's fall stemmed from talk about retail investor outflows.
On Wednesday, Japanese retail investors poured $2.4 billion into new mutual funds investing in global semiconductor firms, banks and U.S. junk bonds, in the biggest single day of fund launches this year.
Investors' attention now shifts to the third Treasury note auction of the week later on Thursday, which is the sale of seven-year paper.
"U.S. bond yields have continued to increase, but unlike last week's rise in yields, this have not been accompanied by a falling dollar," said BNP Paribas FX analysts in a note.
"Accordingly, bond selling from foreign accounts has been halted. Instead, domestic (U.S.) accounts have taken over in selling bonds," they said, explaining why the steep fall in Treasury prices hasn't hit the dollar.
As far as the euro is concerned, the focus will turn to next week's European Central Bank policy meeting where interest rates are expected to stay at 1 percent and more details on the bank's 60 billion covered bond purchase programme may be announced.
The euro remains well supported against the dollar but is threatening to make a decisive fall below key technical support against sterling at the 200-day moving average around 86.80 pence.