By Tom Westbrook

SINGAPORE (Reuters)

The yen touched a three-month low on Monday as Japan's ruling coalition lost its parliamentary majority, causing investors to anticipate a slowdown in future interest rate hikes. Meanwhile, the dollar was set for a monthly gain due to rising U.S. yields.

Yen Performance

On the dollar, the yen reached its weakest point since late July at 153.3 in early-morning trading, and the same milestone occurred at 165.36 against the euro.

Prime Minister Shigeru Ishiba's Liberal Democratic Party (LDP), which has predominantly ruled Japan since World War II, along with coalition partner Komeito, secured 209 of the 465 lower house seats, according to public broadcaster NHK. This represents a decline from the 279 seats they previously held and marks their worst performance since briefly losing power in 2009.

Looking ahead, a period of contentious deal-making is anticipated. Given the significant cost-of-living pressures, traders believe that any new government will likely pressure the Bank of Japan to proceed cautiously with policy normalization. "The market sees a higher risk of economic policy becoming more dovish," commented analysts at Nomura.

Dollar Gains

In other currency markets, the dollar remained stable, poised for its largest monthly gain in 2.5 years. This increase is attributed to signs of a robust U.S. economy and speculation regarding Donald Trump's potential presidential run, which have contributed to rising U.S. yields.

The euro traded at $1.0795, remaining steady on Monday but down more than 3% for the month. The British pound exchanged for $1.2961, marking a 3.1% decline through October.

The U.S. dollar index has risen 3.6% in October, indicating the sharpest monthly increase since April 2022. Ten-year Treasury yields have risen 40 basis points for October, compared to increases of 16 bps for 10-year bunds and 23 bps for gilts.

The Australian dollar traded at $0.6610 on Monday, substantially affected by disappointment over insufficient details in China's stimulus plans, dragging it down about 4.5% for the month. Meanwhile, the New Zealand dollar remained near a three-month low at $0.5974, representing a nearly 6% drop for the month.

Upcoming Data

The upcoming week is packed with critical economic data, including inflation readings for Europe and Australia, U.S. GDP data, and China's purchasing managers' indexes. A Japanese interest rate decision is also anticipated on Thursday, although no policy changes are expected.

Recent weekend data indicated that China's industrial profits plummeted by 27.1% year-on-year in September, placing additional pressure on the yuan, which is on track for a monthly drop of about 1.9%.