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Dollar/yen hits 153.88

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Dollar index eyes largest monthly rise since 2022

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Analysts predict further yen weakness, potential BoJ

caution

(Updates to U.S. afternoon)

By Laura Matthews

NEW YORK, Oct 28 (Reuters) - The yen hit three-month

lows against the dollar on Monday, remaining under pressure as

an election loss by Japan's ruling coalition raises political

and monetary policy uncertainty, while the U.S. dollar headed

for its biggest monthly gain since April 2022.

The dollar rose by as much as 1% to a high of 153.88,

the yen's weakest level since late July. The yen was

last down about 0.7% on the dollar at 153.34, bringing the

decline in October to 6.4%, the largest of any G10 currency.

"The yen has been the most volatile major currency this

year, and a surprise election result has added to this

uncertainty around monetary policy and fiscal policy going

forward," said Adam Button, chief currency analyst, ForexLive,

Toronto.

"Once again, the reaction is to sell a bit of the yen.

It is fresh in the mind of investors how the LDP leadership

election caused the volatility to quickly unwound. So, it's a

difficult one to take a side on."

A period of wrangling to secure a coalition is likely after

Japan's Liberal Democratic Party and its junior partner Komeito

won 215 lower house seats to fall short of the 233 majority.

Traders said the vote would likely result in a government

without the political capital to preside over rising rates and

could usher in another era of revolving-door leadership.

Shigeru Ishiba was Japan's fourth prime minister in a little

over four years, and further instability was widely expected to

breed caution at the central bank, which meets to set rates this

week.

Analysts at BNY said the next immediate target for

dollar/yen would be 155 with 160 a likely line in the sand that

would draw intervention from the finance ministry.

DOLLAR GAINS

Elsewhere, the dollar headed for its largest monthly rise in

two and a half years against a basket of major currencies,

driven by signs of strength in the U.S. economy. Bets on Donald

Trump winning the presidency have also lifted U.S. yields in

anticipation of policies that could delay interest rate cuts.

The U.S. dollar index has climbed 3.6% to 104.46

during October, its sharpest monthly rise since April 2022. It

eased down 0.07% to 104.31.

Most analysts argued that markets are increasingly pricing

in a Republican sweep, with Trump winning the presidency and his

party controlling both chambers of Congress.

The euro, meanwhile, rose 0.15% to $1.0813,

but was still down nearly 3% on the month.

Analysts said the single currency could drop further if the

U.S. enacts a global baseline tariff, in addition to higher

duties on China, and other countries retaliate. Much of the move

would come from higher U.S. policy rates in response to the

inflationary impact of tariffs.

Traders are also upping their bets that the European

Central Bank could cut rates more aggressively, which is also

weighing on the euro.

Investors are now focusing on the U.S. October employment

report this week, which is likely to be affected by a strike at

Boeing and two hurricanes that hit the U.S. Southeast.

The week ahead also includes inflation readings for Europe

and Australia, gross domestic product data in the U.S. and

purchasing managers' indexes for China.

"The market will be looking quite closely for more signs

into what's happening in December. (It's) going to be listening

to what the reaction is to the stronger non-farm payrolls

numbers. It comes down to the Fed's reaction function," said

Peter Vassallo, FX portfolio manager at BNP Paribas Asset

Management in Boston.

He cautioned that with one week to go before the U.S.

election, a calm day like Monday may not be the norm, as "some

uncorrelated and wild moves is also possible" if economic data

surprises this week and the lack of liquidity exaggerates market

moves.