(Updates headline and prices, adds news)

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Yen down 0.85%

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Dollar index hits six-day high as Trump's trade deal

optimism

boosts market mood

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ECB warns euro zone banks on potential U.S. dollar funding

pressures

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Sterling steady despite UK's high borrowing

By Joice Alves and Rae Wee

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

low 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, 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 0.8% at 152.01 per dollar

, 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. And, White House economic adviser Kevin

Hassett 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 0.34% to 98.95.

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 0.27% against a strengthening dollar to

$1.1607, 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 already priced in.