Yen sheds post-Brexit gains as Japan stimulus hopes boosts risk play

[July 12, 2016]  By Anirban Nag

LONDON (Reuters) - The yen hit its lowest in nearly three weeks against the dollar on Tuesday and shed 1.4 percent versus the euro, as a weekend election victory by Japan's ruling coalition paved the way for more stimulus, bolstering risk sentiment.

Gains in global stock markets saw investors cut holdings in the yen, which rose on safe-haven demand after Britain's vote to leave the European Union fueled worries about global growth. But Tuesday's drop saw it erase those gains.

The dollar rose 1 percent to 103.92 yen <JPY=>, its strongest since June 24, when the British referendum result roiled global markets. The euro jumped to 115.37 yen <EURJPY=R> also its highest since June 24.

Japanese Prime Minister Shinzo Abe said on Monday that he will instruct Economy Minister Nobuteru Ishihara to start work on compiling a fiscal stimulus package. Ishihara said on Tuesday the government will submit a supplementary budget in the autumn.

Ishihara said he would start discussions on the package's size. The minister said the government may issue construction bonds, which are earmarked for public works projects.

Ruling party sources had told Reuters before the election that the government was ready to spend more than 10 trillion yen. Another focus is whether the Bank of Japan will expand monetary stimulus at its meeting in late July.

Traders said former Federal Reserve chief Ben Bernanke's presence in Tokyo had boosted expectations that the BOJ was preparing for more easing. The BOJ adopted negative rates earlier this year in addition to its asset buying program, but is far from achieving its inflation target.

"Bernanke, who initiated QE3, is visiting the BOJ, inflating markets with expectations that the BOJ is accompanying the fiscal stimulus with ultra-loose policies," said Hans Redeker, head of currency strategy at Morgan Stanley.

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Commodity currencies including the Australian and New Zealand dollar jumped as stocks extended gains. The New Zealand dollar hit a 14-month high of $0.7318 while the Australian dollar rose 1.5 percent against its U.S. counterpart.

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012. REUTERS/Kim Kyung-Hoon

Sterling rose sharply with interior minister Theresa May set to become Britain's prime minister on Wednesday, easing political tensions that had ratcheted up after the Brexit vote.

The pound rose 1.5 percent to $1.3188, pulling further away from a 31-year low of $1.2798 struck last week, though investors remain uncertain about May's approach to negotiating Britain's exit from the EU. [GBP/]

Bank of England Governor Mark Carney said on Tuesday the Bank, whose monetary policy committee meets on Thursday, was ready to provide more stimulus to cushion the economy.

"We see more downside for the pound both on Thursday and the months ahead," said Josh O'Byrne, currency strategist at Citi, adding he expected a quarter-percentage-point interest rate cut this week and some liquidity or credit support next month.

(Editing by Catherine Evans and John Stonestreet)

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