* Japanese demand for overseas assets hits yen
* Dollar supported after Moody's affirms US credit rating
* Kiwi dollar rises after S&P lifts NZ outlook to stable
* Focus on yet another U.S. Treasury auction (Updates prices)
By Ian Chua
LONDON, May 28 (Reuters) - The yen fell across the board on Thursday, plumbing to a 2-1/2 week low against the dollar as a spike in U.S. bond yields and Moody's affirming the United States' prized triple-A rating 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, driven in part by worries about the ever-expanding amount of debt needed to fund a record $1.75 trillion U.S. budget deficit.
U.S. 10-year Treasuries now yield around 3.8 percent versus 1.5 percent for the Japanese equivalent.
"If you look at yield spreads between Japan and the United States and plot that against dollar/yen, there is a compelling picture to suggest there is scope for the upside if that spread is sustained over the next couple of weeks," said Derek Halpenny, European Head of Global Currency Research at Bank of Tokyo-Mitsubishi UFJ in London.
The yen shed more than 2 percent of its value against higher-yielding currencies such as the Australian and New Zealand dollars.
"Japanese investors are bond investors, so the U.S. dollar bond investments look attractive for them," said Hans-Guenter Redeker, chief fx strategist at BNP Paribas.
"This is having a spill-over effect into many yen crosses, including euro/yen trading above the 200-day moving average, which is actually bringing real money accounts into play."
At 1128 GMT, the dollar was up 1.6 percent at 96.80 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 euro was up 2 percent at 134.40 yen, having reached a 2-1/2 week high of 134.80 yen.
Against a basket of six major currencies, the dollar was barely changed on the day at 80.730 and within sight of a five-month low at just below 80.00 set on Friday.
The euro touched a one-week low of $1.3793 earlier on Thursday but at 1128 GMT was up 0.4 percent on the day at $1.3885.
KIWI SHINES
In contrast to the out-of-favour yen, the New Zealand dollar rose broadly after Standard & Poor's agency lifted the outlook for the country's rating to stable from negative and reaffirmed its AA-plus rating following the government's annual budget.
The New Zealand dollar gained 3.4 percent to 60.49 yen and was up 1.8 percent versus the U.S. dollar at $0.6253.
Data from the Ministry of Finance showed Japanese investors returned from the Golden Week holidays and bought foreign bonds last week, noted RBC Capital Market's global head of FX strategy Adam Cole.
"Anecdotal evidence suggests this flow picked up substantially this week and is a major driver of JPY underperformance," Cole said in a note.
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.
The recent sharp rise in U.S. 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.
Investors' attention now shifts to the sale of seven-year paper due later in the day from the U.S. Treasury Department, which is selling a total of $101 billion of Treasury bonds this week.
For the euro, the key focus will be next week's European Central Bank policy meeting where interest rates are expected to stay at 1 percent and details of the bank's 60 billion covered bond purchase programme are scheduled to be announced.
The euro remained well supported against the dollar, and was last seen at around 87.02 pence, but it is threatening to make a decisive fall below key technical support at the 200-day moving average around 86.80 pence. (Additional reporting by Jamie McGeever; editing by David Stamp and Andy Bruce)