TOKYO The yen on Thursday traded close to a more than two-year low against the dollar touched in the previous session, reflecting expectations that the new government of Premier Shinzo Abe will push to weaken Japan's currency and implement aggressive stimulus.
The dollar surged to 85.735 yen on Wednesday on the EBS trading platform, its highest since September 2010. It was well on track close above its 200-week moving average, now at 84.94 yen, for the first time since the week ending December 23, 2007.
Abe, who has threatened to revise a law guaranteeing the Bank of Japan's independence if it refuses to set a 2 percent inflation target, appointed a cabinet of close allies.
"There appears to be widespread agreement within the new government and its political alliances on the path to take. The majority seems to be willing to back Abe's call for 'bold monetary easing' and a 2.0 percent inflation target for the BOJ," strategists at Brown Brothers Harriman wrote in a note to clients.
New Finance Minister Taro Aso said on Thursday that Abe has ordered him to compile a stimulus package without adhering to a previously agreed cap on new bond issuance.
New Economics Minister Akira Amari said on Thursday the yen was heading toward appropriate levels with its recent weakening, and that it was important to maintain the downward trend.
Japan's currency is poised for a drop of more than 10 percent in 2012, its biggest fall since 2005, with most of the move coming after Abe was elected leader of his Liberal Democratic Party in September.
Continuing negotiations to solve the U.S. "fiscal cliff" budget stalemate also bolstered the dollar as a safe-haven play, as it appeared possible that Congress would fail to reach a deal before January 1 to avert the $600 billion of spending cuts and tax hikes that economists fear could tip the U.S. economy back into recession.
Congress waited on Wednesday for President Barack Obama to return from vacation in Hawaii and make one final attempt to avoid huge tax hikes and spending cuts in the New Year.
U.S. House of Representatives Speaker John Boehner on Wednesday urged the Senate to pass its version of legislation to avert the "fiscal cliff.
The euro traded at $1.3221, steady from late U.S. trading levels, though down from Wednesday's session high of $1.3254 and below its 7 1/2-month high of $1.33085 hit last week.
Against the yen, the euro rose as high as 113.395 yen on EBS on Wednesday, its highest since August 2011, and was last down about 0.1 percent on the day at 113.10 yen.
The dollar index stood at 79.598, down slightly from late U.S. trading but still not far from its Tuesday high of 79.780, which was its highest since December 14.
(Additional reporting by Reuters FX analyst Krishna Kumar in Sydney; Editing by Eric Meijer)