FOREX-Yen hits 2-year low on new Japan govt expectations
* Yen hits 2-year low vs dlr, lowest since Aug 2011 vs euro
* Dollar/yen on track to end above 200-week moving average
* Ongoing "fiscal cliff" stalemate underpins dollar
By Lisa Twaronite and Masayuki Kitano
TOKYO/SINGAPORE, Dec 27 (Reuters) - The yen hit a two-year low versus the dollar on Thursday, reflecting expectations that the new government of Prime Minister Shinzo Abe will push to weaken Japan's currency and implement aggressive stimulus.
The dollar rose to as high as 85.84 yen on trading platform EBS, its highest level since September 2010. The greenback last stood at about 85.79 yen, up 0.2 percent from late U.S. trade on Wednesday.
The dollar is well on track to close above its 200-week moving average, now at roughly 84.95 yen, for the first time since the week ending Dec. 23, 2007.
The yen also fell against the euro, touching its lowest level in nearly 17 months. The euro rose to as high as 113.605 yen, the single currency's strongest level against the yen since early August of 2011.
Abe, who has threatened to revise a law guaranteeing the Bank of Japan's independence if it refuses to set a 2 percent inflation target, appointed a cabinet of close allies on Wednesday.
"There appears to be widespread agreement within the new government and its political alliances on the path to take. The majority seems to be willing to back Abe's call for 'bold monetary easing' and a 2.0 percent inflation target for the BOJ," strategists at Brown Brothers Harriman wrote in a note to clients.
New Finance Minister Taro Aso said on Thursday that Abe has ordered him to compile a stimulus package without adhering to a previously agreed cap on new bond issuance.
New Economics Minister Akira Amari said on Thursday the yen was heading toward appropriate levels with its recent weakening, and that it was important to maintain the downward trend.
Japan's currency is poised for a drop of more than 11 percent versus the dollar in 2012, its biggest fall since 2005, with most of the move coming after Abe was elected leader of his Liberal Democratic Party in September.
"I'm still bullish on the dollar/yen quite a bit," said a trader for a U.S. bank in Singapore.
"In this thin market, I think anything can happen. But definitely I wouldn't go against the trend. The trend is quite clear at this point in time," he added.
One factor that could further weigh on the yen is the potential for currency hedging by non-Japanese investors with exposure to yen assets such as Japanese equities, he said.
"I think there will be some sort of assessment of their hedging policies. I'm not sure everyone is fully hedged," the trader said.
Continuing negotiations to solve the U.S. "fiscal cliff" budget stalemate bolstered the dollar as a safe-haven play, as it appeared possible that Congress would fail to reach a deal before Jan. 1 to avert the $600 billion of spending cuts and tax hikes that economists fear could tip the U.S. economy back into recession.
In a sign that there may be a way to break the deadlock in Congress, Republican House of Representatives Speaker John Boehner urged the Democrat-controlled Senate to act to pull back from the cliff and offered to at least consider any bill the upper chamber produced.
The euro traded at $1.3233, up 0.1 percent from late U.S. trade, but still below an 8-month high of $1.33085 hit last week.
The dollar index stood at 79.586, staying above a two-month low 79.008 hit last week.
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