* Limited reaction to possibility of Japan snap election
* C$ on defensive after BOC policymaker speaks on its strength
By Shinichi Saoshiro
TOKYO, Sept 19 (Reuters) - The dollar hovered near an eight-week high against the yen on Tuesday, supported as U.S. Treasury yields continued their sharp rebound from 10-month lows.
The dollar stood little changed at 111.455 yen after climbing to 111.665 overnight, its highest since July 27.
The greenback has benefited from a recent surge in U.S. interest rates, with the 10-year Treasury yield having climbed to a one-month high of around 2.24 percent overnight.
The U.S. 10-year yield had dropped to the 10-month trough near 2.00 percent on Sept. 8 on widespread risk aversion but has bounced back since.
Investors are now preparing for potentially more hawkish statements from the Federal Reserve after its two-day policy meeting this week, following the Bank of England’s unexpected talk last week of a possible rate hike surprising investors.
The yen showed little reaction to the possibility of Japanese Prime Minister Shinzo Abe calling a snap election for as early as October to take advantage of his improved approval ratings and disarray in the main opposition party.
“Foreign investors usually react instinctively to such themes and there hasn’t been a visible response in currencies thus far,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
“The ruling Liberal Democratic Party (LDP) is enjoying a recovery in support and it is hard to imagine a major change taking place. This is likely leading to the lack of reaction or interest from foreign participants.”
The euro was 0.05 percent higher at $1.1962. The common currency was on track for its fourth straight day of gains, albeit modest ones, having drawn some support from the pound’s recent rally against the dollar.
Sterling was up 0.15 percent at $1.3516.
The currency had soared to a 15-month high of $1.3618 on Monday on speculation that the BoE would raise interest rates soon for the first time in nearly a decade. But the pound’s rally was tempered after BoE Governor Mark Carney said any coming interest rate rises would be limited and gradual.
The Canadian dollar was on the defensive after Bank of Canada Deputy Governor Timothy Lane said on Monday that the currency’s strength will be a factor in future rate decisions.
The loonie was at C$1.2254 per dollar after losing
0.9 percent overnight, when it retreated to a 12-day low of C$1.2338.
The Canadian dollar had surged to a two-year high of C$1.2063 on Sept. 8 after the BOC hiked interest rates.
The Australian dollar was 0.15 percent higher at $0.7972 . (Reporting by Shinichi Saoshiro; Editing by Eric Meijer)