The yen climbed to a 10-month high versus the euro and flirted with a three-year high against the dollar Monday after weekend elections in Japan returned a reform-minded government to power, albeit with a smaller power base.
The dollar fell as low as 107.88 yen in New York, just a touch above the three-year low of 107.82 reached on Oct. 29.
But early today in Tokyo the dollar rallied after Japanese authorities threatened to intervene to halt the yen's advance.
On Monday, analysts said the fact that Prime Minister Junichiro Koizumi weathered the election and consolidated his power in the divided Liberal Democratic Party, which is composed of a blend of reformists and conservatives, might herald a bigger push toward change.
"Almost always, the knee-jerk reaction in the markets to positive news on reforms is yen-positive," said Lara Rhame, U.S. foreign exchange economist at Brown Bros. Harriman in New York. "People look at reform as being a positive thing for Japan, one day, hopefully."
Investors would be more likely to want to hold yen-denominated securities if they had more faith that the Japanese economy would prosper in the long run.
In New York trading Monday, the dollar closed at 108.37 yen, down from Friday's close of 109.26 yen.
But early today the dollar was back to 109.04 after Finance Minister Sadakazu Tanigaki said Japan would take action on abrupt moves in the yen.
A stronger yen hurts Japanese exporters by making their products more expensive overseas.
Japan's Nikkei-225 stock index ended down more than 1% Monday following a sell-off on Wall Street on Friday as investors booked profits on a week of gains after a robust U.S. payrolls report.
The Nikkei was off almost 3% in early trading today after another down day for U.S. stocks.
"The fall in the Nikkei has more to do with Wall Street than the election," said Derek Halpenny, economist at Bank of Tokyo Mitsubishi in London.
Year to date the Nikkei is up about 19% in yen terms, and about 30% in dollar terms.
In other currency news, the Australian and New Zealand dollars hit six-year highs against the greenback on Monday. Prospects of rising interest rates in these two countries, contrasted with the likelihood that U.S. benchmark rates will hold steady at 45-year lows of 1%, are driving the U.S. dollar lower.
Australia raised its benchmark interest rate to 5% last week, and the chances of a further rate rise before year-end were heightened in the Reserve Bank of Australia's policy statement that the Aussie dollar's strong rally this year was "the normal pattern" in light of a strengthening global economy.
The Aussie dollar closed at 71.6 cents, up from Friday's close of 70.8 cents; the New Zealand dollar climbed to 62.2 cents, up from 61.6 cents on Friday.