TOKYO (Reuters) - The yen steadied in early Asian trade on Tuesday after skidding to its lowest level against the U.S. dollar in over a year and a half in the previous session, while the euro held its ground on hope of progress in the U.S. “fiscal cliff” impasse.
The yen plunged after Japan’s conservative Liberal Democratic Party won a landslide victory in the election at the weekend, ahead of this week’s Bank of Japan meeting at which many expect the central bank to take further easing steps.
The euro was seen as benefiting from an improvement in risk appetite on hopes of a progress on the U.S. budget stalemate. U.S. President Barack Obama and top Republican John Boehner met at the White House on Monday to discuss how to avert tax hikes and spending cuts that economists fear could push the economy into recession.
The euro mostly shrugged off comments on Monday from European Central Bank President Mario Draghi, who reiterated concerns over slow growth of Europe’s economy.
“It seems that policymakers are still worried about the euro zone’s economic outlook but euro/dollar continues to hold steady thanks to the rally in equities and the Federal Reserve’s balance sheet expansion,” said BK Asset Management managing director Kathy Lien in a research note.
At its policy meeting last week, the U.S. Federal Reserve announced a new round of monetary stimulus steps.
“No major euro zone economic reports are due for release on Tuesday, leaving the euro/dollar vulnerable to risk appetite,” Lien added.
The dollar was nearly unchanged from late North American levels at 83.86 yen, after rising as high as 84.48 yen in the previous session, its highest since April 2011.
The euro stood at $1.3160, also steady from its late levels, after it touched a 8-1/2-month high of $1.3191 in the previous session.
Against the yen, the euro was nearly unchanged at 110.38 yen, after rising as high as 111.30 yen in the session following Sunday’s Japan election which set the stage for the return to power of former Prime Minister Shinzo Abe.
Abe’s LDP and its ally the New Komeito party secured the two thirds majority needed to overrule parliament’s upper house, meaning Japan’s next government will have a greater chance of pushing though its policies.
“The corrective fall in the dollar/yen after the election was small and it’s crawling up because the yen weakening trend is still intact. But after the BOJ meeting, there will likely be pre-holiday profit-taking, pushing the dollar/yen down by 1-2 yen,” said Yuji Saito, director of the foreign-exchange department in Tokyo at Credit Agricole Corporate & Investment Bank.
The Bank of Japan is scheduled to meet on Wednesday and Thursday, and many analysts expect the central bank to come up with additional easing steps. Sources have said the BOJ could increase its asset-buying and lending program by another 5-10 trillion yen.
Additional reporting by Chikako Mogi; Editing by Eric Meijer