* Yen close to 20-month low versus dollar
* Abe to become Japan’s prime minister on Wednesday
* U.S. budget talks impasse seen supporting dollar
* Dollar index stays above 2-month low hit Dec. 19
By Anooja Debnath
LONDON, Dec 24 (Reuters) - The yen fell on Monday to trade near a 20-month low against the dollar after incoming prime minister Shinzo Abe heaped fresh pressure on the Bank of Japan to adopt a higher inflation target.
The yen, which rose on Friday as some investors trimmed large bets against it, was weighed down by Abe’s comments on Sunday that he would try to revise a law guaranteeing the BOJ’s independence if his demand for a binding 2 percent inflation target -- double its current goal -- is not met.
The dollar was up 0.2 percent on the day at 84.42 yen . Chartists said the dollar needed to overcome 85.05 yen, its 200-week moving average for it to sustain further gains.
“There has been some pretty significant yen selling all through the night and into this morning,” said Peter Kinsella, currency strategist at Commerzbank.
“It is very noticeable we have not seen any retracement or dip in dollar/yen at all. The market is really saying they are convinced on yen weakness and that is what we are going to see for the remainder of this year and in the course of next year.”
The U.S. currency hit a 20-month high of 84.62 yen last Wednesday as the yen fell after a landslide election victory for Abe’s Liberal Democratic Party (LDP).
Abe, who is set to become Japan’s prime minister on Wednesday, has called for aggressive monetary stimulus by the BOJ to beat deflation and this has dragged on the yen.
The yen also slipped against the euro. The single currency was up 0.4 percent on the day at 111.54 yen, not far from a 16-month high of 112.59 yen, hit on Dec. 19, when speculators sold the Japanese currency on expectations of aggressive BOJ easing.
The euro was up 0.2 percent against the dollar at $1.3219. It hit an eight-month high of $1.33085 last Wednesday.
However, a lack of progress since then in U.S. budget talks led market player to dump the euro for the safe-haven dollar, that tends to rise in times of market stress.
The dollar was lower on the day against major currencies, but strategists said it was likely to gain some support given the uncertainty over the talks to avert the so-called U.S. “fiscal cliff” 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.
He said 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.
Some U.S. lawmakers voiced concerns on Sunday that the country would go over the cliff, triggering tax increases and spending cuts early next year that could push the world’s largest economy back into recession.
The dollar surged on Friday after a budget plan proposed by the Republican speaker of the House of Representatives, John Boehner, failed to win support from his own party.
Focus has shifted to Congress acting after Jan. 1
The dollar index, which measures the greenback’s value against a basket of major currencies, stood at 79.528, staying above a two-month low of 79.008 set last Wednesday.
Currency speculators, however, increased their bets against the dollar, with net short positions rising to $6.39 billion in the week ended Dec. 18, from $1.03 billion the previous week, according to data released last Friday.