| NEW YORK
NEW YORK The yen sank to multi-month lows against the dollar and euro on Monday as sources said the Bank of Japan was leaning toward easing monetary policy when it meets next week.
The euro rose against the dollar after two days of losses, as regional elections in Spain over the weekend removed a potential obstacle for the country's prime minister to request an international bailout.
The yen has fallen for eight straight sessions against the dollar. Sources familiar with the BoJ's thinking said the central bank is leaning toward easing monetary policy again next week. Japanese policymakers discussed additional steps that could come together with a further increase in its asset buying scheme.
The central bank has been under renewed pressure to expand monetary stimulus at its October 30 rate review when it is expected to cut its growth forecasts and push back the timing of hitting its 1 percent inflation target.
Dismal data on Japan's exports, which tumbled in September, added to expectations of more policy stimulus from the Bank of Japan.
"A sharp plunge in Japanese exports, historically the lifeblood of Japan's economy, highlighted the growing risk of recession, piling more pressure on local authorities to loosen policy next week," said Joe Manimbo, senior market analyst at Western Union Business Solutions.
The euro hit a more than five-month high of 104.43 yen. It last traded at 104.41, up 1.0 percent on the day.
The dollar hit a peak of 79.94 yen, its highest in 3-1/2 months, gaining momentum after breaching resistance at its 200-day moving average around 79.42 yen. It last traded at 79.92, up 0.8 percent on the day.
Strategists said the yen could rebound strongly next week if the BoJ disappoints expectations and keeps policy on hold. Societe Generale analyst Sebastien Galy recommended paring long dollar/yen positions and maintaining a strategy of buying the dollar on dips.
Jens Nordvig, global head of foreign-exchange strategy at Nomura Securities in New York, said his firm remains long dollar/yen in the spot market from 78.80, and is looking for ways to establish additional exposure to the upside in leveraged form.
EURO GAINS ON SPAIN
The euro is up about 1.6 percent against the dollar so far in October, as Spanish Prime Minister Mariano Rajoy's People's Party secured victory in his home region of Galicia over the weekend, boosting his austerity drive.
The euro also drew support from comments by European Central Bank policymaker Joerg Asmussen, who reiterated that the bank's commitment to do everything in its power to show the euro is irreversible.
"In short, the strong showing in Galicia indicates that Rajoy may now have the political capital to make a formal appeal for a bailout, which would be viewed positively by the market," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
Rajoy, however, faces another test on November 25 when economically powerful Catalonia holds regional elections.
For now, the market is relieved that Spain remains relatively unified and that Rajoy can proceed with plans for stabilizing the country's economy, Schlossberg said.
The euro last traded at $1.3060, up 0.3 percent, with resistance expected around $1.3139, the October 17 high.
Expectations that Spain will apply for a bailout, prompting the European Central Bank to start buying its bonds, have helped support the euro in recent weeks, although uncertainty over the timing of such a move was seen limiting gains.
The euro gained amid a continuing recovery in risk appetite, analysts said.
"Concerns about the Eurozone debt crisis slightly subsided amid positive news flow related to Greece and Spain," said Samarjit Shankar, managing director for global strategy at BNY Mellon in Boston.
(Editing by Leslie Adler)