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[TOKYO] The yen hovered near a one-week low against the US dollar on Tuesday, in the wake of a weekend election victory by Japan's ruling coalition that fanned expectations of more economic stimulus including possible monetary easing.
Gains in equity markets and an improvement in risk sentiment also weighed on the safe-haven yen, which rallied after Britain's vote to leave the European Union and adding to worries over global growth.
The US dollar eased 0.3 per cent to 102.53 yen, after rising to as high as 102.895 yen on Monday, the highest since July 1. The US dollar surged nearly 2.2 per cent on Monday for its biggest one-day rise against the yen since October 2014.
Japanese Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend. Increased public works spending adds to pressure on the Bank of Japan to keep interest rates low.
Investors are now focusing on whether the BOJ will expand monetary stimulus at its policy meeting in late July.
Market participants said the US dollar's latest bounce against the yen was exacerbated by short-covering in the US dollar.
"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 US dollar's rally against yen, Mr Sato said.
He added, however, that the US dollar could bounce back if upcoming US economic data and comments from Federal Reserve officials appear to favour a Fed interest rate rise in September, a view that has lost support of late.
While US jobs data on Friday was much stronger than expected, US 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 eased 0.1 per cent to US$1.2990 but remained above Monday's low of US$1.2851, having found support after Theresa May emerged as the only remaining candidate to lead Britain's ruling Conservative Party.
The pound, which has hit 31-year lows since June's Brexit referendum, bounced slightly on Monday on the news that the Conservative leadership question could be resolved much sooner than expected.
The euro held steady on the US dollar at US$1.1058 and eased 0.2 per cent to 113.45 yen, after climbing nearly 2.3 per cent on Monday.