TOKYO: The dollar quivered in choppy trading against the yen on Monday as oil prices continued to sink on a weak outlook for global demand, while risk aversion pressured US Treasury yields.
A big victory for Japanese Prime Minister Shinzo Abe's coalition in an election on Sunday was a boost for his reflationary economic policies, which are likely to weigh on the yen in the long term. But the Japanese currency initially rose as shares dropped, before it pulled off its session highs.
The dollar was nearly flat on the day at 118.86 yen, after dropping as low as 117.78.
It remained above a two-week low of 117.44 yen touched last Thursday, and a considerable distance away from a seven-year high of 121.86 yen set one week ago.
Japan's Nikkei stock average was down 1.1 percent in midmorning trade. Many market participants, particularly foreign investors, sell the yen to hedge their equities positions, so the Japanese currency tends to feel upward pressure whenever stocks slip.
"I think the market is enjoying the high volatility in dollar/yen, ahead of the holidays.
This week might be everyone's last chance for trading this year," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
Abe's Liberal Democratic Party and junior partner Komeito party were assured of more than the seats required to maintain their two-thirds "super-majority" that smoothes parliamentary business, but record low turnout pointed to broad dissatisfaction with Abe's performance.
Underscoring the uneven recovery brought on by Abe's stimulus policies, the Bank of Japans' closely watched tankan survey showed Japanese big manufacturers' sentiment worsened slightly in the three months to December but corporate spending plans were strong.
The euro was also about flat on the day to around 147.97 yen , after dropping as low as 146.86 earlier.
Against the greenback, the European unit was steady at $1.2456.
Undermining the dollar, the yield on benchmark 10-year notes dropped to 2.088 percent from Fridays' US close of 2.103 percent.
In a discouraging sign for commodities currencies, US crude plunged 1.4 percent in early trade to $57.01 a barrel, after skidding 12 percent last week.
On Friday, the Paris-based International Energy Agency cut its outlook for demand growth in 2015.
The Australian dollar fell 0.2 percent to $0.8220, after earlier dropping toward a 4 1/2-year low around $0.8201.
Further weighing on market sentiment, a hostage situation unfolded inside a central Sydney cafe where a black flag with white Arabic writing could be seen in the window, local television showed on Monday, raising fears of an attack linked to Islamic militants.
Australia's conservative government said it had postponed the Monday release of a mid-year budget update due to the security alert.
Data from the Commodity Futures Trading Commission released on Friday showed that speculators continued to pare net long US dollar position in the latest week through Dec. 9 to the smallest in roughly six weeks.
The value of the dollar's net long position slid by more than $5 billion to $42.19 billion, from $47.38 billion the previous week, marking the smallest net long position on the greenback since late October.
Still, it was the tenth straight week in which US dollar long positions totalled at least $40 billion, which suggests overall sentiment on the US currency remains positive.
"Technically, the dollar has had a strong bull run that has been sustained for several months, and the pullback, thus far, has been quite modest in terms of retracement objectives," Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York, said in a note.
"While that could speak to the dollar's resilience, it may mean that the correction has more room to run. Market positioning is still very extended, and the technical indicators are consistent with additional near-term dollar losses," Chandler said.
Investors await the US Federal Reserve's final meeting of 2014 on Tuesday and Wednesday with a statement and forecasts expected Wednesday at 2:00 p.m. EST (1900 GMT), followed by Fed chief Janet Yellen's press conference half an hour later.
Yellen is seen as erring on the side of being too dovish rather than risking a move that comes in too soon and, compounded with the soft data out of the euro zone, Japan and China, adds to the risk of a slowdown in the US economy.
Fed funds rate futures show that the market expects a rate hike at some point in the third quarter of next year.
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