(Updates with late U.S. trade)

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Yen down 0.76%

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Dollar index hits six-day high as Trump trade deal

optimism

boosts market mood

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ECB warns euro zone banks on potential US dollar funding

pressures

By Hannah Lang

NEW YORK, Oct 21 (Reuters) - The yen eased to a one-week

low on Tuesday after hardline conservative Sanae Takaichi was

elected as Japan's prime minister, with traders betting her

government could muddy the interest rate outlook and bring about

a greater fiscal largesse.

Takaichi, the first female PM and leader of Japan's ruling

Liberal Democratic Party, won the lower house vote on Tuesday to

choose the next prime minister. The move was widely expected by

investors after she was backed by the right-wing opposition

party Ishin.

The Japanese currency was last down 0.76% at 151.895 per

dollar, after earlier touching its lowest level against

the dollar since October 14, in its biggest single-day fall in

two weeks. The yen also struggled against the euro and

sterling.

Earlier on Tuesday, local media reported that Takaichi had

finalized a plan to appoint Satsuki Katayama, a former regional

revitalisation minister, as finance minister.

During an interview with Reuters in March, Katayama signaled her

preference for a stronger yen. Her appointment could give

markets cause to rethink the idea of pushing the yen too low.

"We continue to assume that inflation and the purchasing

power of private households will remain important issues for the

new government in order to improve public approval," said

Volkmar Baur, FX & Commodity Analyst at Commerzbank.

"Therefore, the new government is unlikely to support a

depreciation of the Japanese yen," Baur added.

Still, Takaichi's support for fiscal stimulus and looser

monetary policy kept investors on edge and complicates the Bank

of Japan's path for rate increases.

"From a political perspective ... there may be

considerations to delay monetary tightening until fiscal easing

gains traction. The BOJ is thus caught between a rock and a hard

place," HSBC chief Asia economist Fred Neumann said.

DOLLAR FIRMS

In the broader market, currencies were mostly rangebound despite

an overall upbeat market mood after U.S. President Donald Trump

said on Monday he expects to reach a trade deal with Chinese

President Xi Jinping. White House economic adviser Kevin Hassett

also said that the 20-day U.S. federal government shutdown was

likely to end this week.

Jitters over credit risks among U.S. banks also dissipated

slightly.

The dollar index, measuring the currency against six peers

drew support from a weaker yen and rose to a six-day

high. It was last up 0.312% to 98.921.

European Central Bank's chief economist Philip Lane said on

Tuesday that euro zone banks may come under pressure if U.S.

dollar funding - the lifeblood of financial markets - were to

dry up, amid concern over Trump's policies.

Dollar funding fears have been at the back of central

bankers' minds since Trump announced a wave of trade tariffs and

began putting pressure on the Federal Reserve earlier this year.

The euro fell 0.3% against a strengthening dollar to

$1.161, little helped by easing political uncertainty in France.

Sterling was down against the dollar despite data on

Tuesday showing Britain's borrowing in the first half of the

financial year was the highest since the pandemic, as investors

said a tough budget next month is priced in.