Yen Weakens Amid Political Uncertainty

By Rae Wee

SINGAPORE (Reuters) – The yen remained close to a three-month low on Tuesday due to the ruling coalition in Japan losing its parliamentary majority during the weekend elections, leading to an uncertain political and economic outlook for the nation.

Meanwhile, the dollar saw a minor dip but stayed close to its recent highs as significant U.S. economic data releases were expected later in the week, which could impact the Federal Reserve's policy direction.

The yen last stood 0.1% higher at 153.12 per dollar, after slumping to 153.885 on Monday, its weakest since July, following Japan's elections that resulted in a fragmented government. The Liberal Democratic Party and its junior partner Komeito earned 215 lower house seats, short of the 233 needed for a majority.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, noted, "All up, the risks appear skewed to looser fiscal policy than otherwise under the new government. Together with solid U.S. economic data and stronger prospects of a Trump win, political uncertainty in Japan may push dollar/yen higher in coming weeks. Increased market volatility may also lead the Bank of Japan (BOJ) to maintain its policy interest rate longer than expected."

Against the euro and sterling, the yen struggled near a three-month low, pricing at 165.73 and 198.72, respectively. The BOJ is set to announce its monetary policy decision on Thursday, with expectations to maintain rates.

Dollar Strength

The dollar was poised for its best month in over two years, looking at a 3.5% gain against a basket of currencies. U.S. economic data highlighting economic resilience has enhanced the dollar’s strength, alongside rising market expectations of a Republican win by Donald Trump in the upcoming presidential election. Trump's policies on tariffs and taxes are viewed as inflationary, positively impacting the dollar and negatively affecting bonds.

Upcoming economic reports include the September core personal consumption expenditures (PCE) price index, the Federal Reserve’s main inflation measure, on Thursday, followed by the nonfarm payrolls report on Friday. Ray Attrill, head of FX strategy at National Australia Bank, commented on the importance of Friday's data, suggesting that the election could be the major factor impacting the market, but data releases could cause price adjustments.

In early Asian trading, the dollar dropped slightly but remained in a tight range as investors hesitated to make new positions. The euro increased 0.05% to $1.0816, and sterling rose 0.03% to $1.2976. The dollar index was stable at 104.28.

Other currencies included the New Zealand dollar, which fell 0.08% to $0.5976, and the Australian dollar, which reached its lowest in over two months at $0.6572. It was noted that the Aussie dollar might struggle if broad emerging market reactions occur next week following a Trump victory.

China's yuan was last quoted at 7.1447 per dollar in the offshore market.