FOREX-Loose policy seen in Japan hits yen; Draghi a drag on euro
* Dollar hits 20-month high vs yen * Euro at 8-1/2-month peak vs yen * Euro gains pared vs US dollar as Draghi speaks of low growth * Most expect BOJ to ease policy at this week's meeting * Hefty short yen positioning may limit yen falls By Daniel Bases NEW YORK, Dec 17 (Reuters) - The yen dropped to a 20-month low against the U.S. dollar on Monday after Japan's Liberal Democratic Party won a landslide election victory that leaders promise will usher in aggressive monetary easing policies to weaken the currency. Former prime minister Shinzo Abe returns to power with the LDP's victory. He campaigned on a platform to boost the moribund economy with hyper-easy monetary policy and big fiscal spending to beat deflation, a recipe for weakening the yen that gives Tokyo an export advantage in the international markets. The euro rose against the yen as well, but saw its gains on the U.S. dollar undermined by European Central Bank President Mario Draghi, after he reiterated concerns over slow growth of Europe's economy. In midday New York trade, the greenback was up 0.31 percent to 83.70 against the yen, its best level since April 2011. The euro climbed 0.36 percent to 110.29 yen but fell back from its 8-1/2-month high of $1.3191 to trade at $1.3169, up just 0.06 percent against the U.S. currency. "Just looking at the euro's movement's today, it is coming off the highs after Draghi's comments about growth. Still, it is in an upward trend channel," said Eric Viloria, senior currency strategist at FOREX.com in New York. There were competing forces tugging on the euro. A factor leading to the weakness was Draghi saying the medium-term outlook for the euro zone economy remained "challenging". Weak demand is expected to extend into 2013 and only a gradual recovery is forecast toward the end of that year while interest rates are expected to continue at record lows. On the side strengthening the euro against the U.S. dollar was Richmond Federal Reserve Bank President Jeffrey Lacker who said he expects it will be another three years until the U.S. unemployment rate drops to 6.5 percent. That means monetary policy is expected to remain in the zero to 0.25 percent range through 2015, conditions that weaken the buying power of the U.S. dollar. LDP'S LANDSLIDE Analysts expect the prospect of ultra-loose monetary policy in Japan to weaken the yen further in coming weeks, depending on the pace of policy change. However, given that bets against the yen are already hefty, losses could be limited. The LDP's massive victory will give the new government a greater chance to push through policies and possibly appoint a more dovish central bank chief next year. The LDP and its ally the New Komeito party secured the two-thirds majority needed to overrule parliament's upper house. "The fact that the LDP secured a two-thirds majority gives them a strong mandate and will lead to significant policy changes," said Ian Stannard, head of European currency strategy at Morgan Stanley. "The yen weakening trend will be sustainable and dollar/yen will move higher while euro/yen also has the potential to move sharply higher." He said Morgan Stanley forecasts the dollar to rise to 90-92 yen by the end of 2013, while the euro could rise to 113 yen by the end of this year. The Bank of Japan is scheduled to meet on Wednesday and Thursday. It will most likely increase its asset-buying and lending program, currently at 91 trillion yen, by another 5-10 trillion yen, sources familiar with the bank's thinking said. FISCAL CLIFF WATCH Analysts said the dollar may be hampered by any signs of trouble in U.S. talks to avert the "fiscal cliff" of $600 billion worth of tax increases and spending cuts due next month. Republican House Speaker John Boehner edged slightly closer to President Barack Obama on Sunday with a proposal to extend low tax rates for those earning less than $1 million. Obama has set a threshold for extending low tax rates for those earning below $250,000. U.S. stocks have risen and Treasuries have dropped on the new development. Latest data from the U.S. Treasury showed overseas demand for U.S. assets was weak in October. Foreigners were net sellers to the tune of $56.7 billion in October, the largest outflow since July 2011.