Dollar Holds Steady as Yen Fluctuates Ahead of Japanese Elections

Market Reactions to Currency Movements

By Ankur Banerjee

Impact of U.S. Government Shutdown

SINGAPORE, Feb 4 (Reuters) - The U.S. dollar was steady on Wednesday as investors remained cautious after a partial government shutdown swiftly ended while the yen wobbled near a two-week low ahead of what is shaping up to be an national election over the weekend.

Focus on Japanese Elections

The currency markets were still digesting Kevin Warsh's nomination by U.S. President Donald Trump as the next Federal Reserve chief, with the dollar broadly firming on expectations that Warsh is unlikely to push for rapid rate cuts. 

Prime Minister Takaichi's Economic Plans

Investors have also been relieved as the appointment eased some of the concerns over the Fed's independence after Trump's constant attacks on the central bank and current Fed Chair Jerome Powell.

The euro was at $1.1814 in early trading, while sterling stood at $1.3693, steady ahead of policy meetings at the European Central Bank and the Bank of England on Thursday. Both central banks are expected to stand pat on rates.

The dollar index, which measures the greenback against six major currencies, was at 97.43, not far from the one-week high of 97.73 it touched on Monday. The index fell 1% in January after dropping 9.4% last year.

Strategists at MFS Investment Management view Warsh as a pragmatic policymaker when it comes to setting rates.

"If, down the road, Warsh goes ahead with some balance sheet reduction, this could ultimately put upward pressures on long-end rates. At the same time, however, his appointment may lead to a decline in the inflation risk premium," they said in a note on Wednesday.

Trump late on Tuesday signed a spending deal into law that ends a partial U.S. government shutdown after four days, although crucial employment data that was due on Friday will be delayed because of the shutdown.

JAPANESE ELECTION IN FOCUS

The yen was slightly softer at 156.06 per dollar on Wednesday, inching closer to its weakest since January 23, when the currency strengthened sharply from 159.23 amid speculation the New York Federal Reserve was conducting rate checks, which could mean a possible intervention in the yen market. 

The prospect of a joint U.S.-Japan intervention to boost the yen has broadly pulled the currency back from the brink, although the yen's fate hangs in the balance ahead of this weekend's Japanese election.

In the national election Prime Minister Sanae Takaichi is seeking voter backing for increased spending, tax cuts and a new security strategy that is expected to accelerate a defence build-up.

"A strong showing by the LDP will embolden Takaichi to advance her budget stimulus plans, raising the risk of a larger government debt burden and weighing on Japanese government bonds and the JPY, " said Carol Kong, currency strategist at Commonwealth Bank of Australia.

Takaichi earlier this week triggered a yen selloff after a campaign speech in which she talked up the benefits of a weaker currency. While she later walked back those comments, worries linger that mixed signals from the prime minister could hurt efforts to support the frail currency.

The Australian dollar was at $0.7028 after a sharp 1% rise in the previous session as the Reserve Bank of Australia hiked interest rates, leaving markets wagering further hikes would be needed this year. The New Zealand dollar edged lower at $0.604. 

(Reporting by Ankur Banerjee in Singapore; Editing by Christian Schmollinger)