Yen slips as Japan's election result clouds BOJ rate hike prospects

By Tom Westbrook

SINGAPORE (Reuters) - The yen touched a three-month low on Monday as Japan's ruling coalition lost its parliamentary majority and investors figured that would likely slow future interest rate hikes, while the dollar headed for a monthly gain on rising U.S. yields.

On the dollar, the yen hit its weakest since late July at 153.3 in early-morning trade and it touched the same milestone at 165.36 to the euro.

Prime Minister Shigeru Ishiba's Liberal Democratic Party, which has ruled Japan for almost all its post-war history, and coalition partner Komeito took 209 of 465 lower house seats, public broadcaster NHK reported, with all but 20 accounted for.

That was down from the 279 seats they held previously and marked the coalition's worst result since it briefly lost power in 2009.

A period of fractious deal making is likely to ensue and with cost-of-living pressures a major issue, traders think any resulting government will pressure the Bank of Japan to take policy normalisation very slowly.

"The market sees a higher risk of economic policy becoming more dovish," said analysts at Nomura in a note.

DOLLAR GAINS

Elsewhere currency markets were broadly steady, leaving the dollar on course for its largest monthly rise in 2-1/2 years as signs of strength in the U.S. economy and bets on Donald Trump winning the presidency lifted U.S. yields.

At $1.0795 the euro was steady on Monday but down more than 3% on the month. Sterling bought $1.2961 for a 3.1% drop through October so far.

The U.S. dollar index has climbed 3.6% during October, its sharpest monthly rise since April 2022.

Ten-year Treasury yields are up 40 basis points for October against a rise of 16 bps for 10-year bunds and 23 bps for gilts.

The Australian dollar bought $0.6610 on Monday, with disappointment at the lack of detail or urgent government spending in China's stimulus plans helping drag it about 4.5% lower through October. The New Zealand dollar traded near a three-month low of $0.5974, down nearly 6% for the month.

The week ahead is crowded with data, with inflation readings for Europe and Australia, gross domestic product data in the U.S. and purchasing managers' indexes for China.

An interest rate decision is also due in Japan on Thursday, though no policy change is expected.

Weekend data showed China's industrial profits plunged in September, with a year-on-year drop of 27.1%. The yuan was under pressure in early offshore trade and headed for a monthly fall of around 1.9%.

(Reporting by Tom Westbrook. Editing by Sam Holmes.)