Dollar climbs on LDP election win
The results of the Japanese elections have triggered a strong reaction from investors, pushing the US dollar to a fresh 33-month high against the yen and allowing the Nikkei-225 share average to tumble 1.45 per cent.
Japanese government bonds soared to a record high, following the victory of the conservative Liberal Democratic Party (LDP), fuelling expectations that Japanese interest rates would remain unchanged.
The results, which did not give the LDP an absolute majority, saw the dollar hit 112.86 yen, while the Nikkei sank 309.35 points to 21,302.95.
'The election is one of the factors to help the dollar-yen [rate] higher,' Bank of America senior economic adviser Jeremy Hawkins said.
'It suggests that there will be no significant change in policy.' Limited fiscal tightening is now expected, following a new consumption tax, allowing the central Bank of Japan to keep rates low.
Stocks fell because the failure by the LDP to win a majority meant the party may lack sufficient strength to tackle the country's crippling level of bad loans.
The need by the party to ally with the Social Democrats and the Sakigake parties to form a coalition government suggested there might be opposition to measures aimed at raising liquidity in land transactions, which is needed to lessen Japanese debt.
'The markets like to see a government, irrespective of its hue, but with an absolute majority,' Mr Hawkins said.
'The worries are going to be that they will not be able to tackle the debt issue.' Traders said the selling of the yen occurred mainly in cross-rates with the New Zealand dollar - which hit a five-year high of 79.92 yen, and an eight-year high of 71.4 US cents - and the Australian dollar - which rose to a four-year high against the yen, or a five-year high on a trade-weighted basis.
'The selling's been against the high yielders,' CIBC Wood Gundy's head of foreign exchange trading and sales Clifford Symes said.
After hitting 112.86 yen in Tokyo, the dollar dropped in London as profit-taking came in before the currency recovered to 112.85-112.95.
Mr Symes said the market was still seeing the same investment flows out of Japan into more high-yielding currencies.
'We heard the view last night that the economic recovery is moderating,' HSBC Markets economist Ross Lifton said. 'The markets feel there's no chance of an interest rate rise.' She said the dollar could be expected to stay at current levels until the end of the year before the likelihood of a US and Japanese interest rate rise became more apparent.
'We're close to the peak [in the dollar-yen rate] currently, we're looking for a dollar-yen at 108 by the end of March next year.'