By Tom Westbrook and Stefano Rebaudo
SINGAPORE (Reuters) – The yen hit a three-month low on Monday as investors thought the loss of a parliamentary majority for Japan’s governing coalition in elections this weekend would slow interest rate rises, while the U.S. dollar was heading for its biggest monthly profit since April 2022.
The dollar rose as much as 1% to a high of 153.88, the yen’s weakest level since late July. The yen last fell about 0.2% against the dollar at 152.65, bringing its October decline to 6.4%, the largest among all G10 currencies.
There is likely to be a period of wrangling to secure a coalition, after Japan’s Liberal Democratic Party and its junior partner Komeito won 215 seats in the Lower House, falling short of the 233 majority.
Traders said the vote would likely result in a government without the political capital to control rising interest rates and could usher in a new era of revolving door leadership.
Shigeru Ishiba was Japan’s fourth prime minister in just over four years and further instability was widely expected to prompt caution at the central bank, which meets this week to set interest rates.
“It’s another thing they have to take into account when they have to look at the economy,” the spokesperson said State Street (NYSE:)’s branch manager Bart Wakabayashi in Tokyo. ‘Are we going to have a new set of prime ministers every ten to twelve months? That wouldn’t be good for the yen.’
Analysts at BNY said the next immediate target for the dollar/yen would be 155, with 160 likely a line in the sand that would require Treasury intervention.
DOLLAR PROFIT
Elsewhere, the dollar was heading for the biggest monthly gain in two-and-a-half years against a basket of major currencies, driven by signs of strength in the US economy. Bets on Donald Trump winning the presidency have also raised US interest rates, ahead of policies that could delay rate cuts.
The price rose 3.6% to 104.46 in October, the sharpest monthly increase since April 2022. The last decline was 0.15% at 104.22.
Most analysts argued that markets are increasingly pricing in a Republican victory, with Trump winning the presidency and his party controlling both chambers of Congress.
The euro, meanwhile, rose 0.17% to $1.0816, but was still down more than 3% this month.
Analysts said the common currency could fall further if the US imposes a global base rate, along with higher tariffs on China, and other countries retaliate. Much of this move would come from higher US policy rates in response to the inflationary impact of rates.
Traders are also raising expectations that the European Central Bank could cut rates more aggressively, also weighing on the euro.
“The euro short-term yield curve (ESTR) continues to factor in a 35 basis point rate cut at the December ECB meeting,” said Chris Turner, head of forex strategy at ING.
“And this could easily move towards 50 basis points if soft eurozone data or a US Republican victory (and protectionism) materialises,” he added.
Investors are now focusing on this week’s October US employment report, which is likely to be affected by a strike at Boeing (NYSE:) and two hurricanes that hit the southeastern US.
A further setback from disappointment over Chinese stimulus plans left the Australian and New Zealand dollars under pressure, falling to a two-and-a-half-month low on Monday.
The selling took the stock to $0.5958 and a loss of 6% for October so far, while the stock fell to $0.6579 and was down 4.6% in October.
The week ahead will be packed with data, with inflation figures for Europe and Australia, US gross domestic product data and purchasing managers’ indexes for China.
The weekend data shows that industrial profits in China fell in September, with a year-on-year decline of 27.1%.
The yuan reached its weakest level since late August at 7.1355 per dollar.
