Yen clings to gains as scandal clouds Abe's outlook

TOKYO/SINGAPORE (Reuters) - The yen held firm against the dollar on Tuesday as a political scandal engulfing Japanese Prime Minister Shinzo Abe’s government raised doubts about his ability to continue to pursue his economic policies, including monetary easing.

A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

The yen traded at 106.44 per U.S. dollar, after gaining 0.4 percent the previous day as Abe’s cronyism scandal attracted fresh attention from market participants.

The Ministry of Finance admitted on Monday it altered documents related to a discounted sale of state-owned land to a school operator with ties to Abe’s wife.

The suspected cover-up could slash Abe’s ratings and dash his hopes for a third term as leader of his Liberal Democratic Party (LDP) in LDP leadership vote in September.

That has cast doubts over Abe’s signature reflationist polices, which he’s pushed since his election in 2012 and include efforts to cheapen the yen.

Although such doubts have lent support to the yen, the concerns over Japanese political risks have had a relatively minor effect on wider markets so far, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

“I’m not sure if that’s going to be enough to get us out of this current little risk revival mode that the market is in,” Innes said.

“We’d have to see a further escalation ... for me to get really excited,” Innes said.

Other major currencies were little changed with the U.S. CPI data due at 1230 GMT seen as a key focus for the day.

The median forecasts by economists polled by Reuters points to annual core CPI inflation [USCPFY=ECI] of 1.8 percent in February, which would be flat from January.

A higher reading could stoke expectations that the Federal Reserve will likely raise interest rates four times, rather than three times, this year.

A rate hike at its upcoming policy meeting on March 20-21 has been long considered a done deal while another increase in June is almost fully priced in.

Yet traders are also mindful that the prospects of more U.S. rate hikes, while theoretically positive for the dollar, may not necessarily lift the U.S. currency, given other factors weighing on the greenback.

One big issue is U.S. President Donald Trump’s tariff on steel and aluminium, which many investors worry could trigger retaliatory moves by U.S. trade partners and hurt the economy.

On diplomatic front, the surprise announcement last week that Trump plans to meet North Korean leader Kim Jong Un, boosted risk appetite, but North Korea has stayed mum.

Another point to watch is the health of the global economy, said Roy Teo, an investment strategist for LGT Bank in Singapore.

If forthcoming Purchasing Managers’ Index (PMI) surveys bolster optimism about the outlook for global growth, that could whet investor demand for riskier assets, Teo said.

“If PMIs continue to firm, I think the dollar should be on the backfoot,” he added.

The euro traded at $1.2335, having lost steam since Thursday when European Central Bank President Mario Draghi struck a cautious tone on the euro zone economy.

While acknowledging faster growth in Europe, Draghi said regional inflation remained subdued and rising protectionism is a risk, leading traders to think that the ECB will advance slowly in winding back its stimulus.

Editing by Sam Holmes