The yen fell to its weakest level in almost nine months versus the dollar amid speculation the Japanese opposition leader Shinzo Abe, an advocate of unlimited monetary easing, will win weekend elections.
The dollar snapped a three-day drop as concern Federal Reserve stimulus measures would not offset a failure by policymakers to avert the so-called fiscal cliff boosted demand for the safety of the greenback.
The yen slid against all but one of its 16 major peers, declining the most versus the Korean won, amid speculation the Bank of Japan's Tankan survey will show manufacturers' pessimism grew. The franc rose after the Swiss National Bank maintained its exchange-rate cap against the euro.
"The market is pricing in a poor Tankan, an Abe majority and further BoJ [Bank of Japan] stimulus, which all point to a weaker yen," said Neil Jones, the head of European hedge fund sales at Mizuho Corporate Bank in London. "If there is no deal in the US then there is major risk of a substantial sell-off in risk assets. The euro would come off substantially."
The yen dropped 0.2 per cent to 83.46 per dollar yesterday after touching 83.67, the weakest level since March 21. It slid 0.2 per cent to 109.12 per euro after depreciating to 109.54, the least since April 4. The dollar was little changed at $1.3073 per euro.
Mr Abe, whose Liberal Democratic Party leads in opinion polls before the ballot on Sunday, has called for a doubling of the central bank's inflation goal to 2 per cent and unlimited easing to revive growth.
The BoJ's quarterly Tankan survey, released today, will show sentiment among large manufacturers slid to minus 10 in the fourth quarter from minus 3 in the third, according to the median estimate of 25 economists in a Bloomberg News survey.
That would be the lowest since the first quarter of 2010.
* Bloomberg News