FOREX-Yen weakest since mid-February, euro drops

By Karen Brettell

NEW YORK, Oct 9 (Reuters) - The Japanese yen fell to its weakest level against the dollar since mid-February on Thursday as the newly elected leader of the ruling party Sanae Takaichi said that she did not want to trigger excessive declines in the Japanese currency.

The comments caused a brief yen rally, before it weakened back to its lows of the day.

"We did see an uptick there briefly, at least it indicates that they're watching, but we don't really know what excessive means in the context for what you're going to tolerate," said Adam Button, chief currency analyst at investingLive in Toronto.

The dollar was last up 0.24% at 153.04 yen JPY= after earlier reaching 153.21, the highest since February 13.

The yen has tumbled this week on concerns that Takaichi will introduce more fiscally expansive policies.

The yen has slowed its decline, however, as traders evaluate how much room she will have to stimulate the economy.

“Traders are turning a little bit more sceptical on the Takaichi administration's capacity for passing fiscal stimulus and pushing back against the Bank of Japan's tightening plans,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“That's a reflection of underlying inflation dynamics in Japan. The reality is that Japanese households are agitating for change because inflation is running at elevated levels,” Schamotta said.

Takaichi said that the country's central bank is responsible for setting monetary policy but that any decision it makes must align with the government's goal.

The euro, meanwhile, has dropped since French Prime Minister Sebastien Lecornu tendered his resignation and that of his government on Monday. The political paralysis has made it challenging to pass a belt-tightening budget sought by investors who are increasingly worried by France's expanding deficit.

French President Emmanuel Macron’s office said on Wednesday he would appoint a new prime minister within 48 hours.

The single currency was last down 0.34% at $1.1586 and reached $1.1576, the lowest since August 27. The dollar index gained 0.36% to 99.20, the highest since August 1.

The dollar is being aided by some more hawkish commentary by Federal Reserve officials.

Minutes from the U.S. central bank’s September meeting released on Wednesday showed that officials agreed that risks to the U.S. job market had increased enough to warrant an interest rate cut but remained wary of high inflation.

“We are seeing a more hawkish tone from Fed policymakers, both in the minutes from September's meeting as well as ongoing commentary. And that's pushing back on market expectations for further aggressive easing,” said Schamotta.

Traders are pricing in a 95% chance that the Fed cuts rates by 25 basis points at its October 28-29 meeting, while the odds of an additional cut in December have dropped to 80%, from 90%, in the past week, according to the CME Group’s FedWatch Tool.

New York Fed President John Williams backs more interest rate cuts this year given the risk of a further slowdown in the labor market, he said in an interview published by The New York Times on Thursday.

Traders are also focused on how long the U.S. federal government shutdown will last, with the economy likely to take a bigger hit the longer it drags on.

The U.S. Internal Revenue Service said on Wednesday it will furlough more than 34,000 employees due to the government shutdown, effectively shuttering taxpayer call centers.

In cryptocurrencies, bitcoin BTC= fell 0.95% to $121,773.