Dollar drifts lower ahead of US data, yen perks up after election

The U.S. dollar was weaker on Tuesday before the release of a slate of economic data that is expected to shape the path ahead for interest rates, while the yen firmed for the second day in the wake of Prime Minister Sanae Takaichi's election victory, Reuters reported.

The Japanese yen strengthened to 155.24 per U.S. dollar after rising 0.8% on Monday. Verbal warnings from authorities helped strengthen the yen after the currency weakened in the immediate aftermath of the victory.

The rising expectation that the landslide win could allow Takaichi's government to be more fiscally responsible because it eliminates the need for negotiations with opposition parties has also helped the yen and soothed investor jitters.

The spotlight has now shifted to what Japan does with its massive foreign currency reserves, a $1.4 trillion war chest for future yen interventions. Finance Minister Satsuki Katayama has said using a surplus from the reserves could be considered when discussing funding sources for planned cuts to the sales tax on food.

This idea has many complications, but indicates the focus on maintaining fiscal discipline," said Russell Matthews, a portfolio manager at RBC BlueBay Asset Management.

However, analysts expect the yen to weaken in the long run, noting Takaichi's fiscal policies may weigh on the frail currency. The yen is down 6% since she took charge of the Liberal Democratic Party in October.

"With fiscal policy set to loosen further under a bolder Takaichi administration, I think dollar-yen will ultimately resume strengthening," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "We continue to forecast dollar-yen to increase to 164 by year-end."

The yen was broadly firmer against other currencies, inching away from the record lows versus the Swiss franc and the euro that it has been hovering around.

The euro stood at $1.19125 after a 0.85% jump on Monday. The dollar index , which measures the greenback against six other currencies, was at 96.79, hovering near a one-week low.

The Chinese yuan strengthened past 6.91 per dollar for the first time since May 2023, bringing the gains to more than 1% for the year, with analysts expecting the currency to rise throughout the year.

Seasonal corporate conversion demand and the central bank's stronger fixing guidance have both buoyed sentiment, while media reports that China urged local banks to diversify away from U.S. Treasuries also added to the momentum.

Sterling last fetched $1.369 after a volatile Monday as investors weighed the crisis facing British Prime Minister Keir Starmer and rising wagers of further rate cuts. It last fetched $1.3689 after rising 0.6% in the previous session.