Authors: Laura Matthews, Tom Westbrook, Stefano Rebaudo
NEW YORK/SINGAPORE (Reuters) – The yen hit three-month lows against the dollar on Monday as an election loss for Japan’s ruling coalition increases political and monetary uncertainty and the U.S. dollar posted its biggest monthly gain since April 2022.
The dollar rose as much as 1% to a high of 153.88, the yen’s weakest level since overdue July. The yen, which has recovered most of that loss, was last down around 0.3% against the dollar at 152.72, leading to a fall of 6.4% in October, the biggest of any G10 currency.
“This (recovery) indicates to me that perhaps European and US markets, compared to Japanese investors, do not view political uncertainty in the same light,” said Jane Foley, head of currency strategy at Rabobank London.
“It will also be very important for the markets whether a coalition will be formed relatively quickly so that budget talks can start in December.”
A period of wrangling over securing a coalition is likely to come after Japan’s Liberal Democratic Party and its junior partner Komeito won 215 seats in the lower house, missing their 233 majority.
Traders said the vote would likely result in a government without the political capital to spearhead interest rate hikes and could usher in another 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.
BNY analysts say the next immediate target for the dollar/yen will be 155, with a likely line of 160 requiring intervention by the Finance Ministry.
George Vessey, chief currency strategist at Convera in London, said the coalition losing its majority for the first time since 2009 has contributed to the bearish profile of the Japanese yen as political uncertainty clouds the BoJ’s prospects.
“The yen was already under pressure from rising global yields, while easing risk aversion was encouraging yen-financed carry trades,” Vessey said.
DOLLAR VICTORY
Elsewhere, the dollar posted its 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 presidential election also pushed up U.S. bond yields in anticipation of policies that could delay interest rate cuts.
In October, the index rose 3.6% to 104.46, the sharpest monthly gain since April 2022. It was last down 0.18% to 104.19.
Most analysts argued that markets were increasingly pricing in a Republican push, with Trump winning the presidency and his party controlling both houses of Congress.
Meanwhile, the euro rose 0.22% to $1.0817, but was still down almost 3% on the month.
Analysts say the single currency could fall further if the United States imposes a global headline tariff on top of higher tariffs on China and other countries retaliate. Much of this movement will be driven by higher U.S. interest rates in response to the inflationary impact of tariffs.
Traders are also increasing their bets that the European Central Bank may cut interest rates more aggressively, which also weighs on the euro.
Investors are now focused on the October U.S. jobs report, which is likely to be impacted by the Boeing (NYSE 🙂 strike and two hurricanes that hit the southeastern United States.
The coming week also includes inflation readings in Europe and Australia, gross domestic product data in the U.S. and purchasing managers’ indexes in China.
“The divergent macro picture has led some investors to rethink their stance on the future policy path of individual central banks,” Vessey said.
