FOREX-Yen struggles before Japan election, Aussie up on China move
* Dollar near one-week high against yen ahead of upper house election * Australian dollar rises after China's central bank announces reforms * Japanese PM Abe's party expected to win * Abe victory would add momentum to economic programme, push yen lower By Anooja Debnath LONDON, July 19 (Reuters) - The dollar held near a one-week high against the yen on Friday ahead of Japan's upper house elections, which could add momentum to Prime Minister Shinzo Abe's aggressive economic reform drive. The Australian dollar rose to a session high against the U.S. dollar, after China's central bank announced long-awaited interest rate reforms, a move it said would help lower financing costs for companies. Opinion polls show Abe's ruling Liberal Democratic Party and its New Komeito Party coalition partner are on track to win a hefty majority. That would give him more freedom to push his agenda of monetary easing, public spending and structural reform, which could weigh on the yen. The dollar was down 0.1 percent at 100.25 yen, not far from the one-week high of 100.87 yen hit earlier in the day. Resistance was cited at 101.54 yen, the July 8 high. The dollar is up more than 15 percent against the yen on the year. Chris Turner, head of FX strategy at ING, said any strength in the yen would be temporary. "The focus is very much on beating deflation over the next two years, and the Bank of Japan is committed to doubling its balance sheet by the end of 2014," he said, which will involve pumping yen into the market. Earlier in the session, the yen rose after Japan's benchmark Nikkei slipped. A fall in equities can increase risk aversion and spark demand for the yen, a traditional safe-haven. But the yen stayed vulnerable to the BOJ's massive monetary expansion, while the dollar has been supported by prospects that the U.S. Federal Reserve could start scaling back its stimulus. While the options market has been showing a demand for dollar/yen puts, or bets the dollar will lose ground, one month risk reversals have narrowed to around 1.1 vols in favour of dollar puts on Friday from 1.75 vols on July 11, indicating market players have trimmed their yen strength bets. "The last trend (in risk reversals) is a bit positive for dollar/yen and suggests markets are slightly less concerned about a big correction lower in dollar/yen," ING's Turner said. The dollar index was down 0.1 percent at 82.672, above Wednesday's three-week low of 82.342. Strategists said that with expectations so high there was an outside chance if Abe does not manage a landslide victory it could lift the yen. "It could put a question mark on Abe's policies and be yen positive," said Niels Christensen, FX strategist at Nordea. The euro was down 0.1 percent at 131.53 yen, but not far from a seven-week high around 132.10 yen hit earlier on Friday on trading platform EBS. Against the dollar, the euro edged up 0.1 percent to $1.3122.
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