SINGAPORE: The yen languished near a three-month trough on Tuesday as the loss of a parliamentary majority for Japan’s ruling coalition in weekend elections raised uncertainty about the nation’s political and monetary outlook.
Elsewhere, the dollar eased a touch, though remained not too far from its recent high ahead of major US data releases later in the week that could determine the path for Federal Reserve policy.
The yen was last 0.1% higher at 153.12 per dollar, after having slumped to a low of 153.885 on Monday - its weakest level since July - following Japan’s national election on Sunday that left the make-up of the country’s future government in flux.
A period of wrangling to secure a coalition is likely after Japan’s Liberal Democratic Party and its junior partner Komeito won 215 lower house seats to fall short of the 233 needed for a majority.
“All up, the risks appear skewed to looser fiscal policy than otherwise under the new government,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
“Together with solid US economic data and stronger prospects of a Trump win, political uncertainty in Japan can pressure dollar/yen higher in coming weeks. “Heightened financial market volatility might also encourage the Bank of Japan (BOJ) to keep its policy interest rate unchanged for longer than we currently expect.”
Against the euro and sterling, the yen similarly struggled near a three-month low and last stood at 165.73 and 198.72, respectively. The BOJ announces its monetary policy decision on Thursday, where expectations are for the central bank to keep rates on hold.
Dollar strength
The dollar was headed for its best month in 2-1/2-years on Tuesday, as it eyed a 3.5% gain against a basket of currencies.
A raft of economic data underscoring the resilience of the US economy has bolstered the greenback over the past month, as has increasing market bets of a win by Republican candidate Donald Trump at next week’s US presidential election.
Yen slumps as Japan’s election clouds rate rise prospects
Trump’s policies on tariffs, tax and immigration are seen as inflationary, thus negative for bonds and positive for the dollar.
Ahead of that, a reading on September’s US core personal consumption expenditures price index - the Fed’s preferred measure of inflation - is due on Thursday followed by the closely watched nonfarm payrolls report on Friday.
“Friday’s employment numbers and whether PCE prints at 0.2% or 0.3% are going to be pretty important, so although the election is probably the biggest single factor for next week, we could still have a price adjustment depending on what those numbers show at the end of the week,” said Ray Attrill, head of FX strategy at National Australia Bank.
The greenback dipped slightly in the early Asian session, though it traded in a tight range as investors were hesitant to take on new positions ahead of the data releases.
The euro rose 0.05% to $1.0816, while sterling ticked up 0.03% to $1.2976.
The dollar index was little changed at 104.28. In other currencies, the New Zealand dollar fell 0.08% to $0.5976, while the Australian dollar slid to its weakest level in over two months at $0.6572.
“In terms of G10, the Aussie probably is the standout currency that could suffer if we did see a broader EM (emerging market) gut negative reaction next week if we do see news that Trump has won,” said Attrill.
China’s yuan last stood at 7.1447 per dollar in the offshore market.