* Dollar expected to fall back below 80 yen in medium term-JPM
* Euro steady, well above two-month low hit on Tuesday
By Lisa Twaronite
TOKYO, Nov 16 The yen steadied in early Asian trading on Friday after plunging to a six-and-a-half month low against the dollar in the previous session on expectations a new Japanese government would put pressure on the Bank of Japan to ease further.
Shinzo Abe, leader of the main opposition Liberal Democratic Party and likely to be Japan's next leader, called on Thursday for the country's central bank to adopt interest rates of zero or below zero to spur lending.
The dollar has rallied more than two percent against its Japanese counterpart over the past two sessions after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve parliament's lower house on Friday for an election on Dec. 16.
"The substantial weakening of the yen in the past 48 hours has a lot of people rethinking their game plan," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
"We know that parliament's being dissolved, and the new Liberal Democratic government, when formed, is likely to be more proactive in trying to manipulate the Bank of Japan into further easing, including the potential for moving short-term interest rates negative," he said.
"It seems like perhaps the makings of a shift in the value of the Japanese yen," he said.
But while further yen weakness in coming days is possible, there has been no significant change in yen flows and yield differentials between the U.S. and Japan, Tohru Sasaki, FX Strategist at JPMorgan.
Therefore, the dollar's current rally does not change the medium-term view that the pair will eventually fall back to below 80 yen again, Sasaki said in a note to clients on Friday.
"If current yen weakness is just because of speculation caused by the comments from PM Noda and possible next PM Abe, it is unlikely to be sustainable," he said.
The BOJ is set to hold steady at a policy meeting next week. It might also defy market expectations of action next month and hold off on any further monetary stimulus until early next year to size up the policies of a new government, sources say.
The dollar rose to as high as 81.46 yen on Thursday on trading platform EBS, its highest level since late April. It last traded at 81.14 yen, slightly down from late U.S. trade.
The yen also took a breather against the euro, which was slightly down at 103.70 yen after rising to a two-week high of 104.00 yen on Thursday.
Against the dollar, the euro held steady at $1.2780, staying well above Tuesday's two-month low of $1.2661.
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