Yen firms after Japanese election result, US dollar softens
Japanese markets were closed for a public holiday, leaving the yen as the indicator of possible investor angst.
The currency, however, firmed 0.8% to 147.65 a dollar, but was not far off the 3-1/2-month low of 149.19 hit last week as investors fretted about Japan's political and fiscal outlook.
It also nudged higher against the euro to 172.10 and against sterling to 198.87.
Prime Minister Shigeru Ishiba's Liberal Democratic Party returned 47 seats, short of the 50 it needed to ensure a majority in the 248-seat upper chamber, where half the seats were up for grabs.
Ishiba vowed to stay on in his role even as some of his own party discussed his future and the opposition weighed a no-confidence motion.
Carol Kong, currency strategist at Commonwealth Bank of Australia, said markets likely priced in a much worse outcome for the ruling coalition heading into the election and doubted that the yen could sustain its strength.
"It remains unclear whether Ishiba can indeed survive as the prime minister...and what it means for Japan's trade negotiations with the U.S.," said Kong. "Prolonged political uncertainty will be negative for Japanese assets, including the yen."
The election result, while not entirely a shock to markets, also comes at a tricky time for a country trying to get a tariff deal with U.S. President Donald Trump before an August 1 deadline.
"Japan's political picture has become more complicated, with investors also focusing on the U.S.-Japan tariff row," said Roberto Mialich, global FX strategist at UniCredit.
The increased political fragility is likely to constrain the Bank of Japan's ability to tighten monetary policy in the near term, said David Chao, global market strategist for Asia Pacific at Invesco. "It may be reluctant to add further pressure to an already volatile landscape."
TARIFF UNCERTAINTY
Investor focus has been firmly on Trump's global tariff salvos, with a Financial Times report last week indicating the U.S. president was pushing for steep new tariffs on European Union products.
U.S. Commerce Secretary Howard Lutnick said on Sunday he was confident the U.S. can secure a trade deal with the EU, but said August 1 was a hard deadline for tariffs to kick in.
EU diplomats said the bloc was exploring a broader set of counter measures against the U.S. as prospects for an acceptable trade agreement fade, even though a negotiated solution was still their preferred option.
The euro was up 0.2% at $1.1658, while sterling last fetched $1.3467. The dollar index, which measures the U.S. currency against six others, was down 0.3% at 98.107.
The European Central Bank is due to meet this week and is expected to hold rates steady after a string of cuts, while investor attention has been on whether the Federal Reserve succumbs to pressure from Trump to cut interest rates.
"We doubt ECB President Christine Lagarde will shake things up too much ahead of the central bank's summer break, although there may be some continued concerns over recent euro strength and particularly the direction of tariffs," said Chris Turner, ING's global head of markets.
Trump appeared near the point of trying to dismiss Fed Chair Jerome Powell last week, but backed off with a nod to the market disruption that would likely follow. The U.S. central bank is widely expected to hold rates steady in its July meeting.
Traders are fully pricing in a rate cut by the October meeting with the odds of a second rate cut this year not fully priced in yet.
The New Zealand dollar eased 0.1% to $0.5964 after consumer inflation accelerated in the second quarter but stayed below economists' forecasts, leading markets to raise the chance of a rate cut next month given the broader economic weakness.
(Reporting by Ankur Banerjee in Singapore and Samuel Indyk in London; Editing by Shri Navaratnam, Kirsten Donovan and Rachna Uppal)
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