TOKYO: The dollar held its own on Tuesday after European Central Bank officials raised the prospects of further stimulus steps and as investors waited to see if Japan's leader would call a snap election after the country unexpectedly slipped into recession.
ECB President Mario Draghi said on Monday that the central bank is ready to take more steps to support the euro zone's recovery.
Earlier in the day, ECB Executive Board member Yves Mersch detailed what such steps might include, and said the ECB could theoretically buy gold, shares, exchange traded funds (ETFs) or other assets if needed. The euro was steady on the day at $1.2450 , down from a more than two-week peak of $1.2580 hit overnight.
The dollar index, which measures the greenback against a basket of major currencies, rose to 87.999, pushing closer to a four-year high of 88.267 set on Friday.
The dollar was steady on the day at 116.68 yen, within sight of its seven-year peak of 117.06 yen touched on the EBS trading platform on Monday after Japan's downbeat gross domestic product data.
Japan's economy contracted an annualised 1.6 percent in July-September, after plunging 7.3 percent in the second quarter following a rise in the national sales tax, which hit consumer spending hard.
The technical recession sets the stage for Prime Minister Shinzo Abe to delay an unpopular further hike to the sales tax and call a snap election.
"We expect PM Abe to announce a VAT hike delay on Tuesday, dissolve the lower house on Wednesday, and hold a general election on December 14 ," Barclays strategists said in a note. Barclays tweaked its dollar-yen forecasts and now expects the pair to stand at 120 in six months and 117 in one year, compared to previous estimates of 112 in both the six-month and one-year horizons.
The revision was made "to reflect the deterioration in Japan's inflation outlook and the Bank of Japan's response to that outlook," they said.
In Tuesday's trading, the dollar is likely to take its directional cues from Japanese equities, which tend to move inversely with the yen as market participants sell the yen to hedge their equities positions.
The Nikkei stock average was 1.5 percent higher in early trade, bouncing from the surprise GDP data-driven tumble on Monday and putting downward pressure on the Japanese unit.
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