Dollar hits 15-year low ahead of Japan leadership vote

The dollar slid to a new 15-year low against the yen on Tuesday ahead of a Japanese ruling party leadership vote in which the prime minister faces a challenge from a proponent of more aggressive fiscal stimulus.
The dollar hit a nine-month low against the Swiss franc and a one-month low against a basket of currencies after suffering its steepest fall against the euro in two months the previous day as rising investor risk appetite helped the euro.
Japanese media surveys have shown the race between Prime Minister Naoto Kan and party heavyweight Ichiro Ozawa is too close to call, although analysts said some last-minute speculation Kan could edge Ozawa was fuelling dollar selling.
"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.
As Ozawa has been more emphatic than Kan in saying he would consider currency intervention, even solo intervention, some market players would see an Ozawa victory as positive for the dollar, at least in the near term.
But any rise in the dollar may be short-lived, with Monday's 84.43 intraday peak seen as the first point of resistance, due to expectations of more dollar selling by Japanese exporters ahead of their half-year book closing on September 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 fall 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 started to spike on August 26, the day Ozawa announced his bid for the party leadership.
On Tuesday the dollar fell to 83.25 yen before returning to 83.35 yen, down about 0.4% on the day.
The dollar/yen 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, the dollar came under pressure against the yen due to falls in U.S. bond yields despite strength in global shares.
The euro traded at $1.2882, flat on the day and keeping much of Monday's 1.6% gains following solid data from China and relief over new Basel III banking rules.
It faces a major resistance point at $1.2920-30, a level that has blocked the currency a few times since August.
The dollar index languished at 81.80, down 0.2% after grazing a new one-month low of 81.757 and piercing its 200-day moving average of at 81.761. A clear break below the moving average could stoke pessimism over the U.S. currency.
The yen also recouped some of its recent losses on the crosses, particularly against the Australian and New Zealand dollars which shed about 1% on the day as Monday's improvement in investor sentiment failed to maintain momentum.
"There's been less follow-through on Asian equities, commodity currencies haven't fared as well and that's probably another factor supporting the yen," said Mitul Kotecha, global head of FX strategy at Credit Agricole CIB in Hong Kong.
The New Zealand dollar also dropped about 0.6% to $0.7295 after weaker-than-expected New Zealand retail sales added to the case against a rate hike.
That rate outlook contrasts sharply with Australia, where strong jobs numbers have raised expectations of a future hike, lifting the Aussie against the New Zealand dollar.
The Australian dollar rose 0.4% to NZ$1.2790, edging closer to a four-month high around NZ$1.2845 hit earlier in the month.
Against the U.S. dollar, the Aussie dollar fell 0.2% to $0.9331, still a whisker from five-month high around $0.9363 struck on Monday.
Sterling fell 0.2% to $1.5400 after surprisingly weak house price data.