* Dollar firmer vs yen, trades near Friday’s 7-week high
* Sterling steady vs dollar, pauses after last week’s rally
* Focus on Fed’s Sept 19-20 policy meeting (Updates prices, adds comments)
By Masayuki Kitano
SINGAPORE, Sept 18 (Reuters) - The dollar held firm near a seven-week high versus the yen on Monday, supported by recent rises in U.S. yields, while sterling took a breather after surging last week on growing expectations that the Bank of England could raise interest rates soon.
The dollar rose 0.3 percent to 111.19 yen, trading within sight of Friday’s peak at 111.33 yen, the dollar’s highest level since late July.
The dollar gained nearly 2.8 percent against the yen last week, buoyed by a rise in U.S. Treasury yields that bolstered the greenback’s appeal, and as data showing a pick up in U.S. consumer prices helped rekindle expectations that the Federal Reserve could raise interest rates again in December.
“We’ve certainly seen some adjustment on the December rate hike probabilities. I think that may carry the day at least until we get into the FOMC,” said Stephen Innes, head of trading in Asia-Pacific for Oanda, referring to this week’s Fed policy meeting.
The yen’s recent drop against other currencies, such as sterling, has had some spillover impact and lent added support to the dollar versus the yen, traders say.
Trading conditions in Asia on Monday were thinner than usual, with Japanese markets closed for a public holiday.
Over the next month or so, Japanese politics may become a focal point for currency traders, given indications that Japan is headed for an early election.
Japanese Prime Minister Shinzo Abe is considering calling a snap election for as early as next month to take advantage of his improved approval ratings and disarray in the main opposition party, government and ruling party sources said on Sunday.
Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said the fact that the main opposition party is in disarray bodes well for Abe and the ruling Liberal Democratic Party if a snap election is called.
“Since the opposition is looking shaky, it seems like there is no way that they can lose,” Okagawa said, adding that a favourable election outcome for Abe and the LDP might be viewed as a renewed vote of confidence in the prime minister’s push for reflationary economic policies including aggressive monetary stimulus, known as “Abenomics”.
As a result, the news about a possible early election could be regarded as a yen-selling factor, Okagawa said.
Other traders played down the impact on the yen, saying the low-yielding, safe haven currency was weighed down more by upbeat risk sentiment, with the U.S. S&P 500 having set a record high on Friday.
The focus for this week is the Fed’s Sept. 19-20 policy meeting. The Fed is seen likely to announce a plan to start shrinking its balance sheet at the meeting, but is widely expected to keep interest rates unchanged.
Investors will be watching the Fed’s views on the outlook for the economy and inflation, as well as well as possible assessments of the impact from Hurricanes Harvey and Irma.
The euro held steady at $1.1946, staying below a 2-1/2 year high of $1.2092 set earlier this month.
Sterling held steady against the dollar after having rallied sharply last week on growing bets the Bank of England will raise interest rates soon.
On Friday, sterling rose past the $1.36 level for the first time since the Brexit vote, after comments from BoE policymaker Gertjan Vlieghe echoed the central bank’s signal that the first rate increase in a decade could happen in “coming months”.
Sterling held steady at $1.3597. On Friday, it had risen to as high as $1.3616, the strongest since June 24, 2016.
Against the yen, sterling edged up 0.4 percent to 151.16 yen , having surged about 5.9 percent last week for its biggest weekly gain since July last year. (Reporting by Masayuki Kitano; Editing by Richard Borsuk and Kim Coghill)