The dollar was broadly higher in Asian trade on Friday, notching a fresh seven-year high against the yen as investors increased bets that Japan's leader would call an election and delay a sales tax hike. The dollar index rose about 0.4 percent on the day to 88.061, on track for a weekly gain, and pushing closer to its high touched one week ago of 88.190, its loftiest peak since June 2010.
The greenback climbed 0.4 percent to 116.25 yen, rising as high as 116.29. "The quick move today really looked like a stop-loss move, but having said that, I don't know why anyone would be short" dollars, said Bart Wakabayashi, head of forex at State Street in Tokyo.
"The general trend is still to be long dollars, there's no doubt about that," he said. Still, yen calls - the right to buy the yen - are more in demand than yen puts - the right to sell, as investors are using options to hedge against a sudden yen rebound. Investors are waiting to see if Prime Minister Shinzo Abe calls an early election to postpone an unpopular tax hike and seek a mandate on his economic reforms before his approval ratings slide. A senior ruling party lawmaker was quoted on Thursday as saying Abe had decided to do this.
Abe has said he will decide on whether to proceed with the planned October 2015 tax increase after seeing preliminary figures on third-quarter growth, due on Monday. The first increase in the two-stage sale tax hike in April took a significant toll on the Japanese economy, and many economists would welcome a delay in the second-phase of the tax hike as positive for growth.
Japanese companies overwhelmingly hope the tax increase will be postponed or scrapped, a Reuters poll showed on Thursday. Election speculation has given a massive boost to Japanese stocks and weighed on the yen. The Nikkei stock average closed up 0.6 percent on Friday, keeping pressure on the Japanese currency. Many market participants, particularly foreign investors, sell the currency to hedge their equities positions.
"We believe that JPY corrections are likely to be more limited at this stage. Increased expectations of snap Japanese elections and delays implementing the sales tax hike currently support USD/JPY via a higher Nikkei," strategists at Morgan Stanley wrote in a note. The dollar fell to a session low of 115.32 yen overnight, after US data showed that new jobless claims unexpectedly increased last week, though they still stood near a 14-year low.
The euro slipped about 0.3 percent to $1.2433, holding above a two-year low of $1.2358 hit a week ago, but still pressured by expectations that the European Central Bank will take more steps to bolster prices and stimulate the euro zone economy. ECB Governing Council member Christian Noyer told French business daily Les Echos that said he saw no problem with buying government bonds if interest rates rose, or if the European economy suffered new shocks that derailed inflation forecasts. "I would see no problem if the ECB bought other assets and, if needed, government bonds if, for example, rates rose because of a tightening of monetary policy in the United States in 2015," he said in an interview due to be published on Friday.
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