By: Hillel Fuld
The dollar dipped to an additional15-year low versus the JPY on Tuesday ahead of a Japanese ruling party leadership vote in which the prime minister will be presented with a challenge from a proponent of more aggressive fiscal stimulus.
The USD was also approaching a one-month low vs a variety of currencies after suffering its most significant decrease against the EUR in two months the previous day as investor risk appetite rose to help the European currency.
Japanese press surveys have indicated that the race between Prime Minister Naoto Kan and party heavyweight Ichiro Ozawa is too close to call before a party conference due to start at 0500 GMT. The result is expected at around 0630 GMT.
"If Kan wins, the market will try to sell the dollar, betting that Japan cannot intervene and sell the yen at this stage," said Daisuke Karakama, a market economist at Mizuno Corporate Bank.
Since Ozawa has been more known to be more emphatic than Kan regarding currency intervention, even solo intervention, some market investors would claim that an Ozawa victory is positive for the dollar, at least in the short term.
But any increase in the dollar may be short-lived given expectations of more USD selling from Japanese exporters ahead of their half-year book closing on Sept. 30.
"There are some expectations of an Ozawa victory. But many traders are not looking to buy more dollars. They just want to sell the dollar if there was intervention that would push up the dollar," said a trader at a Japanese bank.
Junya Tanase, a currency strategist at J.P. Morgan Chase Bank, said the dollar could decrease even if Ozawa wins as Ozawa's reflationist policy platform could boost Japanese bond yields, shrinking the yield gap between Japan and the United States.
"We think there is little difference between the two candidates in their stance on intervention. But an Ozawa victory could boost Japanese bond yields as the bond market seems to be sensitive about fiscal deterioration," Tanase said,
Japanese bond yields began to spike on Aug. 26, the day Ozawa announced his candidacy for the party leadership.
The dollar fell to 83.25 JPY, before settling at around 83.40 yen, down about 0.4 percent on the day.
The USDJPY rate has closely tracked U.S.-Japan yield gaps, partly because a smaller gap means less incentive for Japanese investors to buy U.S. debt instruments. And on Monday, dollar/yen came under pressure due to falls in U.S. bond yields despite strength in global shares