The yen slipped on Monday as Japanese Prime Minister Junichiro Koizumi was set to call a snap election after suffering a major political blow from parliament's rejection of bills to privatise the postal system. Analysts said the political shake up in Japan could unnerve foreign investors who have bought a net 10.73 trillion yen ($95.48 billion) of Japanese stocks and bonds so far this year, undermining the yen.
"In the short-term and long-term, this is negative for the yen," said Toru Umemoto, chief forex strategist for Japan at Barclays Capital in Tokyo.
"I think the market underestimates the negative impact of the political confusion. Even after the election, the political confusion is likely to continue," he said.
The yen hit a seven-year low against the Australian dollar a three-month low against the euro and inched closer to a seven-year low versus the Korean won.
Koizumi told senior members of the ruling Liberal Democratic Party that he would dissolve parliament, party officials said, while the head of a ruling coalition partner said that a election would be held on September 11.
Worries about a potential election had pushed the Nikkei stock average down more than 2 percent from 15-month peaks hit last week and overshadowed an increasingly upbeat outlook for Japan's economy.
The yen had fallen earlier after more upper house members of the ruling Liberal Democratic Party said over the weekend they would vote against the bills, tipping the odds against passage.
Koizumi has repeatedly said that a rejection would be tantamount to a vote of no-confidence - a tacit threat to call a lower house election that could risk the long-ruling LDP losing power.
The dollar bought around 112.45 yen, up 0.5 percent from late US trade on Friday and but little changed after the vote results.
The euro was at 138.60 yen after rising to around 138.85 yen, its highest level since late April.
But the single currency slipped against the dollar to near $1.2325 down from a two-month high of $1.2403 hit on Thursday.
The Australian dollar fell more than half a percent against the US dollar after the Reserve Bank of Australia said in a quarterly statement that inflation risks were balanced and dropped a prior reference that a further rise in interest rates was likely.
The Aussie fell to near 76.40 US cents, about a cent below one-month highs hit last week.
Some said the dollar would likely get renewed support after the July jobs report came in stronger than economists had forecast, reinforcing expectations that the Federal Reserve would lift interest rates at least a few more times.
The Fed is expected to deliver its 10th straight 25 basis point increase in its funds rate at a meeting on Tuesday, taking it to 3.5 percent.
A Reuters poll found fewer US primary dealers expect the Fed to pause its credit tightening campaign this year, meaning rates could rise to 4.25 percent by year end.
The payrolls data showed 207,000 jobs were created in July while employment gains were revised up for the previous two months.
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