FOREX-Yen strengthens as markets weigh intervention risks to Takaichi trade

By Sophie Kiderlin and Gregor Stuart Hunter

LONDON, Feb 9 (Reuters) - The yen strengthened on Monday after Japanese Prime Minister Sanae Takaichi's election victory, reversing six consecutive days of losses as traders bet fiscal stimulus will boost the stock market, while the U.S. dollar eased against other major currencies.

The yen had initially pulled back slightly after Takaichi's win on Sunday, with the currency reaching its weakest in two weeks, but then strengthened as the trading day continued. The dollar was last around 0.4% lower against the yen at 156.56 JPY=.

The yen also retraced losses against other currencies, which earlier saw it reach its weakest level on record against the Swiss franc CHFJPY= and trade near the weakest point since the creation of the euro EURJPY=.

"While the initial yen weakness may not have played out, the outlook for the yen is still one which is likely to struggle to strengthen," said Sim Moh Siong, currency strategist at OCBC in Singapore.

"At least in the near term, there's also concern about intervention risk, which may be capping the upside for dollar-yen."

Japan's top currency diplomat Atsushi Mimura said earlier on Monday that the government is "closely watching currency movements with a high sense of urgency" after Takaichi's coalition swept to a historic election win.

"There's no doubt that this gives Takaichi a mandate for a pro-growth policy stance and it's a fight between that being a good thing and debt dynamics, which have been worrying the market," Societe Generale head of FX strategy Kit Juckes said.

Juckes said the long-end of the Japanese government bond market had so far not reacted negatively to Takaichi's win, and as long as this remained the case, the yen was temporarily safe.

However, some volatility is expected, "as markets assess the implications of the LDP’s landslide victory for currency dynamics," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.

"Under a reinvigorated LDP mandate, fiscal policy is likely to turn more expansionary, with measures such as a consumption tax cut on food now more likely," Chao said. "While this would further strain Japan’s fiscal position, it would also add to inflationary pressures, potentially bringing forward the timeline for Bank of Japan rate hikes."

DATA RELEASES AHEAD IN US

Elsewhere, the U.S. dollar index =USD, which measures the greenback's strength against a basket of six currencies, was down 0.3% at 97.33, at the start of a week in which there will be several key data releases out of Washington, including retail sales, inflation and Wednesday's delayed jobs report.

"I don't think the dollar can weaken much unless the economy slows significantly," Societe Generale's Juckes said, adding that this was however a possible scenario.

Traders are weighing their bets on policy easing from the Federal Reserve later this year. Fed funds futures were last pricing in an implied 15.9% probability of a 25-basis-point cut at the U.S. central bank's next two-day meeting on March 18, down from a 18.4% chance on Friday, according to the CME Group's FedWatch tool.

Also on Monday, Bloomberg News reported Chinese regulators have advised financial institutions to curb their U.S. Treasury exposure, sending the onshore yuan to a 33-month high.

The euro was last around 0.4% higher against the dollar at $1.1867. =EUR=

The pound GBP= was last flat against the dollar but lower against the euro as markets considered developments in a political crisis. British Prime Minister Keir Starmer's chief of staff resigned on Sunday, saying he was taking responsibility for advising Starmer to name Peter Mandelson as ambassador to the U.S., despite his known links to late sex offender Jeffrey Epstein.

Bitcoin BTC= dipped 1.25% to $69,729.66 while ether ETH= fell 2.34% to $2,044.64.