FOREX-Yen heads for fourth straight day of losses ahead of Japan's elections

By Laura Matthews and Stefano Rebaudo

NEW YORK/MILAN, Feb 4 (Reuters) - The dollar rose against the yen on Wednesday, pushing the Japanese currency towards its fourth consecutive daily decline ahead of elections expected to boost Prime Minister Sanae Takaichi's fiscal and defence spending ambitions.

Meanwhile, the euro and the pound softened against the greenback after the Institute for Supply Management said on Wednesday that the U.S. services sector held steady in January, although rising input costs signalled a possible rebound in services inflation after recent easing.

Markets were closely watching the report after a partial U.S. government shutdown, which ended late on Tuesday, delayed the release of key jobs data due on Friday, adding to uncertainty over the U.S. Federal Reserve's interest rate path.

"(The) level on activity is decent even if it slipped slightly, but not a big enough surprise to change anyone's view," said Steve Englander, head of global G10 FX research at Standard Chartered Bank.

The yen JPY= was last down 0.62% at 156.69 per dollar, after hitting its weakest level since January 23, when the currency strengthened sharply from 159.23 amid speculation the New York Federal Reserve conducted rate checks. U.S. Treasury Secretary Scott Bessent denied last week that Washington was intervening to support the yen, arguing the U.S. has a strong dollar policy.

The yen has dropped more than 2% since January 30.

Strategists mentioned an Asahi Shimbun poll released at the weekend providing a strong indication that the ruling coalition government of the Liberal Democratic Party (LDP) and Japan Innovation Party are likely to build on their slim majority in the country's lower house, and may even secure a two-thirds majority, although that would be a bigger surprise.

Takaichi earlier this week triggered a yen selloff after a campaign speech in which she talked up the benefits of a weaker currency. While she later walked back the comments, there are lingering worries that mixed signals from the prime minister could hurt efforts to support the frail currency.

"Markets are being driven by Japan election risks, cooling euro zone inflation, and a renewed focus on U.S. growth and labor momentum, leaving the dollar modestly supported while the yen remains the clear underperformer," said Joel Kruger, market strategist with LMAX Group in London.

"Attention is squarely on what incoming activity and employment signals mean for the outlook, with the Federal Reserve still expected to stay on hold near term - while softer labor trends would pull forward rate-cut expectations and firmer resilience would push easing further out, keeping FX and rates highly sensitive to macro data."

U.S. DATA IN FOCUS

The dollar jumped against the euro and the yen last week after U.S. President Donald Trump chose former Fed Governor Kevin Warsh to head the U.S. central bank when Jerome Powell's leadership term ends in May, easing concerns about an overly dovish Fed.

Warsh has argued that productivity gains from artificial intelligence could justify easier policy, while calling for a smaller Fed balance sheet in a mix that would steepen the yield curve but leave the broader interest rate direction uncertain.

The dollar index =USD, which measures the greenback against six major currencies, rose 0.25% to 97.64.

The Australian dollar AUD= fell 0.26% to $0.7004 after a sharp 1% rise in the previous session as the Reserve Bank of Australia hiked interest rates.

The yuan CNY=CFXS has been clocking steady gains. While analysts think authorities will resist further strengthening, the risks are to the upside and China's fragile economy could be tested.

STRONG EURO MIGHT AFFECT ECB PATH

The euro EUR= slipped 0.15% to $1.1801, ahead of the European Central Bank's policy decision on Thursday, with investors keen on any comments about how the single currency's valuation might affect the policy path.

The euro hit a 4-1/2-year high at 1.2084 last week as policymakers flagged growing concerns over its quick appreciation, warning that it could drag inflation down even as price growth is already set to undershoot the ECB's 2% target.

ECB Vice President Luis de Guindos said last summer that an exchange rate of 1.20 versus the dollar was acceptable, but levels beyond that could become more complicated.

Analysts said the euro-dollar trade has recently been driven almost entirely by sentiment over the greenback while interest rate differentials remained in the background.