By Asher Levine and Carolyn Cohn
SAO PAULO/LONDON Feb 24 (Reuters) - Ukraine's dollar bonds rallimed on Monday on expectations the heavily indebted nation would receive aid from Western donors, while recovering investor sentiment helped Brazil's currency reach its strongest level in a month.
Ukraine, whose President Viktor Yanukovich was forced out of office at the weekend, said on Monday it needed $35 billion in foreign assistance over the next two years and appealed for urgent aid.
Investors were optimistic that Western organizations such as the International Monetary Fund would step in to help prevent a Ukrainian default now that Russia seems less likely to deliver the remaining $12 billion of a $15-billion bailout package agreed in December.
Ukraine's five-year credit default swaps (CDS) fell 166 basis points from Friday's close to a 3-week low of 941 bps, according to Markit. Ukraine's 2023 dollar bond rose 4.83 points to 89 cents on the dollar, according to Reuters data.
"Political considerations in this instance override economic or financial ones and ... Western aid is likely to be substantial enough to prevent a credit event from taking place in the short term," Goldman Sachs said in a client note, referring to the risk of default or restructuring in Ukraine.
Ukraine's 2017 dollar bond gained 4.0 points to 90 cents on the dollar, while the 2022 dollar bond rose 4.31 points to 89.125.
But the hryvnia fell to a five-year low. Analysts said the country is running out of foreign exchange reserves to support it and is likely to focus its use of funds on repaying dollar debt.
"Given that international reserves have likely, on our estimates, declined ... to $12-14 billion, we think downside risks to the UAH (hryvnia) remain large," Goldman Sachs added.
Other emerging European currencies were generally steady, supported by the news from Ukraine. Russia's rouble and Hungary's forint both strengthened slightly against the dollar.
Elsewhere, Nigeria's naira rebounded from early losses against the dollar after the central bank and energy company Total sold dollars on the market, dealers said.
REAL GAINS PAST 2.34/DLR
In Latin America, both the Mexican and Chilean pesos gained about 0.25 percent against the dollar while Brazil's real strengthened past the 2.35 per dollar threshold for the first time in over a month.
Data on Monday showed inflation in Mexico eased in mid-February, boosting expectations that the central bank would leave rates on hold throughout the year.
The real, which has weakened about 8 percent since mid-October on concern over economic fundamentals, has rallied for four days as investors view the government's new primary budget surplus target with cautious optimism. The target of 1.9 percent of gross domestic product, albeit lower than in previous years, could help build credibility in the nation's economic policies.
President Dilma Rousseff said on Monday that Brazil's currency fluctutions "should not be confused with vulnerability" and were part of a normal price adjustment process that would create more "more realism in our trade relations."
Neighboring Venezuela's five-year credit default swaps eased but remained at extremely distressed levels above 2,000 bps, according to Markit, after nearly two weeks of violent anti-government protests that have killed at least eight people.
Latin American stocks rose as slight gains in Chilean and Mexican shares helped offset a decline in Brazilian stocks.
Still, broader emerging market stocks fell as Chinese shares posted their biggest loss in seven weeks on worries about the property market.
News reports stoked fears that banks have begun tightening loans to developers before next week's annual parliamentary meetings, fuelling worries about a slowdown in China's property market and growth outlook.