The Japanese Yen dropped to a three-month low on Monday after investors anticipated that the ruling coalition in Japan losing its parliamentary majority in weekend elections could delay interest rate hikes.
Meanwhile, the US Dollar was on track for a monthly increase driven by rising Treasury yields.
During the Asian trading session, the Yen fell to 153.88 against the Dollar and 166.06 against the Euro, marking its weakest levels since late July. By then, the Yen was down roughly 0.7% against the Dollar, with a 6.4% slide throughout October, making it the steepest drop among G10 currencies.
A period of negotiation to form a coalition is now expected, as the Liberal Democratic Party and its junior partner, Komeito, secured 215 seats in the lower house, falling short of the 233-seat majority needed, Reuters reports.
Traders noted that the election outcome might lead to a government lacking the political leverage to support rising interest rates, potentially ushering in another phase of revolving-door leadership.
Fumio Kishida's tenure may have lasted just under three years, yet his successor, Shigeru Ishiba, marks Japan’s fourth prime minister in just over four years. This ongoing instability is widely expected to lead to a cautious approach from the central bank, which is scheduled to meet to set interest rates this week.
“It's one more thing for them to consider when they should be looking at the economy. Are we going to have another series of prime ministers every 10-12 months? That would not be good for the Yen,” said State Street's Tokyo branch manager Bart Wakabayashi.
BNY analysts indicated that the next short-term target for the Dollar/Yen pair is 155, with 160 being a potential threshold likely to prompt intervention by Japan’s finance ministry.
Meanwhile, the Dollar continued to climb, poised for its largest monthly gain in two and a half years, bolstered by indicators of a robust US economy. Additionally, expectations of a Donald Trump presidential victory have driven up US yields, as investors anticipate policies that might delay interest rate cuts.
The Dollar index, measuring the currency against six peers, has surged 3.6% to reach 104.46 in October, its steepest monthly gain since April 2022.
The Euro held steady at $1.0790 on Monday, though it has declined over 3% for the month. Whereas the Pound was trading at $1.2952, marking a 3.1% drop in October.
Meanwhile, 10-year Treasury yields have risen by 40 basis points this month, compared to a 16-basis-point increase for 10-year German bunds and a 23-basis-point rise for UK gilts.