Yen weathers Japanese political turbulence

TOKYO (AFP) - The yen gained on the dollar and the euro in Asian trade Monday as worries about the health of the US economy outweighed jitters about political uncertainty after weekend elections in Japan, dealers said.

They said the yen was buoyed by continued nervousness about the outlook for global share prices as investors scaled back risky investments funded by cheap Japanese credit.

The dollar slipped to 118.52 yen in Tokyo morning trade from 118.60 in New York late last Friday.

The euro eased to 1.3628 dollars from 1.3632 and to 161.53 yen from 161.69.

The dollar remained under pressure against the Japanese currency after Wall Street saw a fresh sell-off on Friday, said Ryohei Muramatsu, treasury manager at Commerzbank in Tokyo.

Investors dumped US shares last week on concerns about a possible credit squeeze due to the US housing woes that could reduce the amount of cash available for takeover activity, dealers said.

"The boom of mergers and acquisitions is fading, which has led to falls in US shares and as a result is weighing on the dollar," said Muramatsu.

He said players had cut back on risky bets, prompting an unwinding of the carry trade whereby speculators had used cheap yen to buy higher yielding currencies such as the British pound and the New Zealand dollar.

Dealers were watching political developments after Prime Minister Shinzo Abe's government suffered a heavy defeat in Sunday's elections for the less powerful upper house of parliament.

The yen showed resilience to the outcome, despite worries about policy gridlock due to a divided parliament but analysts warned of risks ahead.

"The Japanese yen is likely to be destabilised," said Toru Umemoto, forex strategist at Barclays Capital.

"Political instability and an economic reform policy backlash are likely to be negative for the yen," he predicted.

There was speculation that the election rout could prompt the Bank of Japan to delay raising interest rates to avoid adding to the stock market's gloom, particularly after a recent major earthquake in central Japan.

A rate hike now seems unlikely in August and may be difficult for the BoJ to justify in the following months given the current political instability, Muramatsu of Commerzbank said.

Japan's interest rates, which at just 0.5 percent are by far the lowest in any of the major economies, are seen as encouraging the carry trade.

The market is awaiting US economic indicators due this week including an industrial survey Wednesday and a key employment report for June Friday, after figures last week showed the US economy grew at a slightly stronger than expected 3.4 percent in the second quarter.