FOREX-Japanese yen tumbles on likely new leader, euro slides after French PM steps down

By Gregor Stuart Hunter and Alun John

SINGAPORE/LONDON, Oct 6 (Reuters) - Politics dominated currency markets on Monday as the Japanese yen weakened by the most against the dollar in five months as Sanae Takaichi looked set to become Japan's next prime minister, while the euro slid on news that France's new prime minister had quit.

Takaichi is a former economic security and internal affairs minister with an expansionary fiscal agenda for the world's fourth-largest economy, and won the ruling Liberal Democratic Party's leadership election at the weekend.

Her victory caused traders to reduce bets that the Bank of Japan will hike interest rates this month and reassess their view on the direction of the yen.

The dollar rose 1.8% to 150.1 yen, its highest since August. If sustained, that would be its biggest daily gain since May 12. JPY=

In Asian trade the euro hit 176.22 yen, its highest ever against the yen, but later pared those gains to be up 1.2% at 175.3 yen. EURJPY=

Deutsche Bank had advised clients to position for yen appreciation, but they "are now getting out following the LDP election outcome this weekend", the bank's global head of FX research, George Saravelos, said in a note to clients.

"Sanae Takaichi’s surprise victory reintroduces too much uncertainty around Japan’s policy priorities and the timing of the BoJ hiking cycle."

Long-dated Japanese government bonds sold off, with the 40-year JGB yield jumping 15.2 basis points to 3.538%. The yen swaps market on Monday now indicates a 41% likelihood of a rate hike by December, down from 68% on Friday.

Meanwhile, the euro slid after France's new prime minister, Sebastien Lecornu, resigned, pushing politics in debt-laden France further into difficulty.

The euro dropped 0.7% to $1.16635 EUR=EBS and also slid 0.3% against the pound to its lowest in nearly a month. EURGBP=

Sterling was down 0.2% against the dollar at $1.3445. GBP=

Elsewhere, this week traders will have to grapple with the absence of important pieces of U.S. economic data as the government shutdown continues.

That could make it hard to shake current market pricing signalling that easing at the Fed's October meeting is a near-certainty. Fed funds futures implied a 96.7% probability of a 25-basis-point rate cut, according to the CME Group's FedWatch tool.

The lack of U.S. data also leaves scope for markets to react more than they normally would to other inputs such as remarks from policymakers, said Francesco Pesole, currency analyst at ING.