TOKYO: The dollar edged back toward a seven-year high struck earlier this week against the yen, as speculation swirled that Japan's Prime Minister Shinzo Abe will call a snap election in December.
The greenback was up 0.2 percent at 115.74 yen, nearing the seven-year high of 116.11 yen notched on Tuesday.
Elsewhere in the market, the Australian dollar slid after a Reserve Bank of Australia official said the central bank had not ruled out intervening to sell its own currency, which it regards as overvalued.
The dominant factor in the market this week, however, has been talk of a snap election in Japan.
Analysts reckon Abe would use a victory to implement a second round of reflationary policies and possibly delay a planned sales tax hike. This has spurred a rally in Tokyo's Nikkei share average and weighed on the yen. The Nikkei fell earlier in Thursday's session but was up 1 percent, poised to mark its highest close in seven years.
Traders said the yen has been following domestic stocks recently as many participants, particularly foreign players, sell the currency to hedge their equities positions.
The yen's fall and the Nikkei's advance was slowed on Wednesday when a top government spokesman cooled speculation of Abe taking the sales tax issue to voters.
But the respite was cut short when a senior figure in Abe's ruling party told reporters it appeared the premier has decided to call an election. Abe is widely expected to make his election decision depending on the strength of economic indicators, with third quarter gross domestic product data due to be released on Monday.
"Policymaker comments are a bigger focus than data ahead of next week's GDP release," Citigroup's foreign exchange strategist Todd Elmer said in a note.
The market also awaited US data like jobless claims later in the session and retail sales data on Friday.
The numbers may reinforce perceptions that the US economy is doing better than either Europe's or Japan's, raising the prospect of more policy divergence that has been helping to push the dollar higher against the euro and yen.
Reflecting an improving economy, the Federal Reserve ended its money-printing programme last month, while the BOJ boosted its stimulus measures to re-energise a fragile recovery.
The European Central Bank is also under pressure to ease more and support a sluggish euro zone economy.
"The market was able to absorb stop-loss selling of the dollar when it broke below 115 yen overnight as bargain hunting soon emerged.
With US and Japanese monetary policies on divergent paths, participants are still poised to buy the dollar on dips," said Kaneo Ogino, director at Global-info Co in Tokyo. The euro was flat at $1.2444, confined to a narrow range and managing to stay clear of a two-year low of $1.2358 hit last week.
The Australian dollar was down 0.25 percent at $0.8699 after Reserve Bank of Australia Assistant Governor Christopher Kent repeated that intervention to weaken the currency remained an option.
The Aussie has fallen 2.5 percent against the dollar so far this year but the RBA had repeatedly said the currency was over-valued. As China is Australia's main export market, the Australian dollar is sensitive to China's economic fortunes.
But it showed little reaction to China's industrial output and retails sales figures, which were roughly in line with expectations.
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