FOREX-Yen steadies as Japan election looms, intervention fears build

• Yen retreats from 18-month lows after verbal jawboning
• Early election triggers worries about Takaichi spending plans
• Dollar steadies as traders weigh Fed independence under Trump
• Geopolitical tensions weigh on risk proxy Aussie and Kiwi

By Ankur Banerjee

SINGAPORE, Jan 15 (Reuters) - The yen stabilised near 18-month lows on Thursday as markets remained cautious over intervention risks after strong verbal warnings from Japanese officials ahead of a national election.

The yen JPY= was steady at 158.63 per dollar after firming 0.4% on Wednesday as Japanese Finance Minister Satsuki Katayama renewed a verbal warning on "one-sided depreciation". U.S. Treasury Secretary Scott Bessent urged policy measures to address FX volatility.

The currency though was not far off the 18-month low of 159.45 it touched on Wednesday and has dropped nearly 5% since Japan's Prime Minister Sanae Takaichi took office in October as investors fretted about her spending plans.

Takaichi plans to dissolve parliament's lower house next week and call a snap parliamentary election, a move that has sparked a selloff in the yen and Japanese government bonds.

The prospect of an early election has triggered fiscal concerns amid worries about the country's massive debt load, dragged the yen down to the intervention zone and complicated the rate path for the Bank of Japan.

Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, said if the yen continues to weaken towards or within intervention threshold ranges, then intervention risk cannot be ruled out this coming Monday, a U.S. holiday.

"If there is intervention, it likely occurs before 162 but the intervention range is perhaps between 161-163," Newnaha said.

Japan last intervened in the currency market in July 2024, spending $36.8 billion to lift the currency as it fell to a 38-year low of around 161.96 to the dollar.

Moh Siong Sim, FX strategist at OCBC, said markets will monitor if words will be followed up by action, noting it was questionable if the yen can see significant and sustained strength.

"Unless we get a more hawkish Bank of Japan or we get an easing of fiscal concerns."

The BOJ is due to meet next week with markets broadly expecting the central bank to stand pat after it raised rates last month to a 30-year high of 0.75%.

FED INDEPENDENCE WORRIES LINGER

The dollar was knocked back at the start of the week after the Federal Reserve Chair Jerome Powell called out the Trump administration's decision to subpoena him, saying it amounted to intimidating the Fed into delivering easier monetary policy.

Benoit Anne, managing director at MFS Investment Management, said the latest episode reinforces the case for global diversification.

"Most of the market volatility over the past few months has been caused by the U.S. so it makes sense from a risk management perspective to diversify exposures across regions, asset classes and currencies."

The greenback has since recovered as traders took the escalation in stride even though investors remain concerned about the Fed's independence under President Donald Trump.

Against a basket of currencies, the dollar =USD was steady at 99.129, near a one-month high it touched on Wednesday. The index was flat for the week. The euro EUR= stood at $1.16405, while sterling GBP= eased to $1.36295.

Trump said on Wednesday he has no plans to fire Powell despite the Justice Department's criminal investigation into the Fed chair, but it was "too early" to say what he would ultimately do.

With markets looking through the tussle so far, focus has instead been on U.S. economic health and rates outlook while simmering geopolitical tensions weighed on risk sentiment.

Data on Wednesday showed that U.S. producer prices picked up slightly in November amid a surge in the cost of gasoline, while U.S. retail sales increased more than expected in November.

The slate of economic data in recent days has cemented the case for the Fed to stay on hold in January with markets still expecting two rate cuts this year but not before Powell's term ends in May.

Elsewhere, the risk-sensitive Australian dollar AUD= weakened 0.16% to $0.6672, while the New Zealand dollar NZD= slipped 0.26% to $0.5735. AUD/