By Hannah Lang
NEW YORK (Reuters) -The yen fell to a one-week low on Tuesday after hardline conservative Sanae Takaichi was elected prime minister of Japan, with traders betting her government could cloud the interest rate outlook and trigger greater fiscal largesse.
Takaichi, the first female prime minister and leader of Japan's ruling Liberal Democratic Party, won Tuesday's lower house vote to choose the next prime minister. The move was widely expected by investors after being backed by the right-wing opposition Ishin party.
The Japanese currency was last down 0.76% at 151.895 per dollar, after earlier hitting its lowest level against the dollar since October 14, in the biggest single-day drop in two weeks. The yen also struggled against the euro and sterling.
Earlier on Tuesday, local media reported that Takaichi had finalized a plan to appoint Satsuki Katayama, a former regional revitalization minister, as finance minister.
During an interview with Reuters in March, Katayama expressed her preference for a stronger yen. Her appointment could cause markets to reconsider the idea of pushing the yen too low.
“We still assume that inflation and the purchasing power of private households will remain important issues for the new government to increase public approval,” said Volkmar Baur, FX & Commodity Analyst at Commerzbank.
“Therefore, the new government is unlikely to support a depreciation of the Japanese yen,” Baur added.
Still, Takaichi's support for fiscal stimulus and looser monetary policy kept investors on edge and complicated the Bank of Japan's path to rate hikes.
“From a political perspective… there may be considerations to delay monetary tightening until fiscal easing gains momentum. So the BOJ is caught between a rock and a hard place,” said Fred Neumann, HSBC's chief economist, Asia.
DOLLAR COMPANIES
In the broader market, currencies remained largely range-bound despite a generally upbeat market mood after US President Donald Trump said on Monday he expects to strike a trade deal with Chinese President Xi Jinping. White House economic adviser Kevin Hassett also said the 20-day US federal government shutdown was likely to end this week.
The jitters about credit risks among American banks also disappeared somewhat.
The dollar index, which measures the currency against six peers, was supported by a weaker yen and rose to a six-day high. It was last up 0.312% at 98.921.
European Central Bank chief economist Philip Lane said on Tuesday that euro zone banks could come under pressure if US dollar funding – the lifeblood of financial markets – were to dry up, amid concerns about Trump's policies.
