FOREX: Yen steadies as traders gird for election, intervention fears lurk

The yen held onto overnight gains on Thursday but was pinned near 18-month lows as traders remained wary of intervention after strong warnings ahead of an election in Japan that could usher in more fiscal stimulus and keep the currency constrained.

The yen JPY= fetched 158.554 per dollar in early Asian hours after firming 0.4% in the previous session as Japanese Finance Minister Satsuki Katayama issued another verbal warning.

The currency though was not far off the 18-month low of 159.45 it touched on Wednesday and has dropped nearly 5% since Japan's Prime Minister Sanae Takaichi took office in October as investors fretted about her spending plans.

Takaichi plans to dissolve parliament's lower house next week and call a snap parliamentary election, a move that has sparked a selloff in the yen and Japanese government bonds in recent days as speculation swirled.

The prospect of an early election has triggered fiscal concerns amid worries about the country's massive debt load, dragged the yen down to the intervention zone and complicated the rate path for the Bank of Japan.

"Verbal warnings have helped cap yen weakness for now, but investors are likely to probe authorities' willingness to follow words with action," said OCBC FX strategists in a note.

"For a more meaningful JPY rally, markets need a hawkish BOJ stance and clarity on Japan’s fiscal and political outlook."

FED INDEPENDENCE WORRIES LINGER

The dollar was knocked back at the start of the week after the Federal Reserve Chair Jerome Powell called out the Trump administration's decision to subpoena him, saying it amounted to intimidating the Fed into delivering easier monetary policy.

The greenback has since recovered as traders took the escalation in stride even though investors remain concerned about the Fed's independence under President Donald Trump.

Against a basket of currencies, the dollar =USD was steady at 99.129, near a one-month high it touched on Wednesday. The index was flat for the week. The euro EUR= eased to $1.1636, while sterling GBP= bought $1.3636.

The heads of central banks across the globe said on Tuesday Powell had acted with integrity and that central bank independence was crucial for keeping prices and financial markets stable. Most of the Fed policymakers also backed Powell.

Trump said on Wednesday he has no plans to fire Powell despite the Justice Department's criminal investigation into the Fed chair, but it was "too early" to say what he would ultimately do.

With markets looking through the tussle so far, focus has instead been on U.S. economic health, rates outlook and simmering geopolitical tensions.

Data on Wednesday showed that U.S. producer prices picked up slightly in November amid a surge in the cost of gasoline, while U.S. retail sales increased more than expected in November.

The slate of economic data in recent days has cemented the case for the Fed to stand pat in January with markets still expecting two rate cuts this year but not before Powell's term ends in May.

In other currencies, the Australian dollar AUD= was at $0.66845, while the New Zealand dollar NZD= weakened 0.12% to $0.5743.

-Ankur Banerjee/Reuters