*

Yen down 0.57%

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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

(Updates with U.S. morning trade)

By Hannah Lang and Joice Alves

NEW YORK/LONDON, 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 to choose the

next prime minister on Tuesday.

The move was widely expected by investors after she was

backed by the right-wing opposition party Ishin.

The Japanese currency was last down 0.57% at 151.62 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

finalised a plan to appoint Satsuki Katayama, a former regional

revitalisation minister, as finance minister.

During an interview with Reuters in March, Katayama

signalled 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," he 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," said HSBC chief Asia economist Fred Neumann.

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 0.245% to 98.855.

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 0.23% against a strengthening dollar to

$1.1613, little helped by easing political uncertainty in

France.

Sterling was little changed against the euro

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.