Improvement in risk sentiment weighs on safe haven yen
The yen hit a one-week low versus the dollar on Tuesday, after a weekend election victory by Japan's ruling coalition fanned expectations of more economic stimulus and bolstered risk sentiment.
Gains in equity markets helped spur selling of the yen, which had risen recently on safe haven demand after Britain's vote to leave the European Union added to worries over global growth.
The dollar rose 0.3 per cent to 103.05 yen and touched a high of 103.29 yen at one point, its strongest level since July 1.
As the yen slipped broadly, the euro gained 0.5 per cent to 114.17 yen. Against the dollar, the euro rose 0.2 per cent to $1.1083.
Japanese Prime Minister Shinzo Abe said on Monday that he will instruct Economy Minister Nobuteru Ishihara on Tuesday to start work on compiling a fiscal stimulus package, but did not mention how much the size of spending will be.
Ruling party sources had told Reuters before the election that the government was ready to spend more than 10 trillion yen.
Another focus in coming weeks is whether the Bank of Japan will expand monetary stimulus at its policy meeting in late July.
Market participants said the dollar's bounce against the yen since the start of the week has been exacerbated by position squaring.
“In dollar/yen, there had been an excessive build up of yen-buying positions and such bets are getting squeezed,” said Shinsuke Sato, head of FX trading group for Sumitomo Mitsui Banking Corporation.
Some market players will now probably be looking to sell into the dollar's rally against the yen, Sato said.
He added, however, that the dollar could add to its gains if upcoming U.S. economic data and comments from Federal Reserve officials appear to favour a Fed interest rate rise in September, a view that has lately lost support.
While US jobs data on Friday was much stronger than expected, U.S. interest rate futures suggest that many market participants doubt that the Fed will raise interest rates this year, in the wake of Britain's shock vote last month to leave the European Union.
Sterling rose 0.6 percent to $1.3078, pulling away from a 31-year low of $1.2798 struck last week.
The gains in the pound came as Interior Minister Theresa May was set to become Britain's prime minister on Wednesday with the task of steering its withdrawal from the European Union, after her rival withdrew from the contest.
While Andrea Leadsom's exit removes the need for a drawn-out leadership contest, investors remain uncertain about May's approach to negotiating Britain's exit from the European Union.
As long as Britain keeps moving forward with procedures to leave the European Union, sterling is likely to remain under pressure, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
“While the pound might rise on a daily basis, I think it makes more sense to expect that its downtrend will continue over the medium to longer term,” Murata said.