* Yen hovers near 20-month low versus dollar
* Abe will become Japan’s prime minister on Wed
* Dollar index stays above 2-month low hit Dec. 19
* Disarray in US budget talks seen supporting dollar
By Masayuki Kitano
SINGAPORE, Dec 24 (Reuters) - The yen fell and neared a 20-month low versus the dollar on Monday after incoming premier Shinzo Abe renewed pressure on the Bank of Japan to adopt a 2 percent inflation target.
The yen, which rose on Friday on position-squaring, came back under pressure after Abe said on Japanese television on Sunday that he will try to revise a law guaranteeing the BOJ’s independence if his demand for a binding inflation target is not met.
The dollar rose 0.2 percent against the yen to 84.40 yen .
The greenback had hit a 20-month high of 84.62 yen last Wednesday as the yen retreated in the wake of a landslide election victory by Abe’s Liberal Democratic Party (LDP).
Abe, who is set to become prime minister on Wednesday, has put the BOJ at the centre of political debate, urging bolder monetary stimulus to beat deflation.
The dollar was steady to firmer against major currencies, having gained a boost after negotiations to prevent a U.S. fiscal crunch hit an impasse last week and dented investors’ appetite for risky assets.
“It looks like all momentum for the fiscal cliff negotiations is gone,” Rob Ryan, strategist for RBS in Singapore, said on Monday.
Some U.S. lawmakers voiced concern on Sunday that the country would go over the “fiscal cliff”, and trigger the steep tax increases and spending cuts that are due to take effect early next year.
Economists say such fiscal tightening could push the U.S. economy back into recession unless Congress acts quickly to ease the economic blow, and focus is now shifting to the possibility of Congress acting after Jan. 1.
The dollar had surged on Friday after a budget plan proposed by the Republican speaker of the U.S. House of Representatives, John Boehner, failed to win support from his own party. That deepened worries U.S. lawmakers might not reach a deal to avoid the fiscal cliff by year-end.
The greenback will probably hold firm in the near term, although it could get pushed around by year-end flows over the next several days, said Ryan at RBS.
There has been some market chatter that Asian central banks, which are thought to have conducted dollar-buying intervention over the last few weeks, may be looking to sell the dollar to buy currencies such as the euro and the Australian dollar, in order to diversify their portfolios, Ryan said.
On the other hand, U.S. companies might buy the dollar for year-end fund repatriation, he added.
“So we have two conflicting flows. I would prefer to favour the second,” he said, referring to the possibility of the dollar getting support from fund repatriation.
The euro fell 0.1 percent versus the dollar to $1.3182 .
The single currency has retreated since hitting an eight-month high of $1.33085 last Wednesday, as the lack of progress in the U.S. budget talks gave a boost to the dollar, a safe haven currency that tends to rise in times of market stress.
The dollar index, which measures the greenback’s value against a basket of major currencies, stood at 79.598, staying above a two-month low of 79.008 set last Wednesday.