The yen recovered from a 3-1/2 month low against the euro and regained ground versus the dollar on Monday as jitters over the impact of a possible snap election in Japan failed to derail the currency. Prime Minister Junichiro Koizumi dissolved parliament's powerful lower house for a September 11 election after losing a key vote on postal industry reform in parliament.
A political shake-up in Japan could unnerve foreign investors - who have bought nearly $100 billion worth of Japanese stocks and bonds so far this year - and undermine the yen. But Koizumi is betting that elections could purge his party of anti-reformers and allow him to go ahead with reforms.
"It's interesting that the shock announcement has not been enough to derail yen strength," Citigroup chief currency strategist Steven Saywell said.
"We'd argue all along that the fundamentals for the yen are strong ... this was the worst-case scenario and we've seen the spike and it's been less of a spike than many had envisaged," he added.
Meanwhile, the dollar weakened versus the euro as investors waited to see whether the Federal Reserve will sound hawkish after Tuesday's interest rate decision.
At 1402 GMT the yen was at 111.62 yen per dollar, up 0.2 percent up on the day, after hitting a week low of 112.62 yen.
Against the euro, the yen was also recovering some poise to 138.15 yen, up 0.1 percent on the day. It fell as low as 138.89 yen in Asian trading hours, its lowest level since April 22.
The dollar was down slightly against the euro at $1.2379, but up from a two-month low around $1.2400 hit last week.
Sterling scored a one-month high versus the dollar after data showed British raw material costs increased at their fastest annual rate in over 20 years in July.
The pound traded at $1.7882 per dollar, up more than half percent on the day. It hit $1.7903 earlier in the session, its highest level since July 1.
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