Investing.com - The dollar rose to fresh seven year highs against the yen on Monday as a steep drop in energy prices fuelled fears over the threat of deflation in Japan, underlining the diverging policy outlook between the Federal Reserve and the Bank of Japan.
USD/JPY touched highs of 119.03, the most since August 2007, and was last at 118.72, up 0.11% for the day.
U.S. oil prices fell more than 2% on Monday, extending a broad based selloff in the wake of last Thursday’s decision by the Organization of the Petroleum Exporting Countries not to cut output quotas.
The move fuelled a broad based selloff in oil prices and added to fears over the impact of growing deflationary pressures on Japan’s faltering economy.
Gold prices were also sharply lower, falling more than 1.5% after Switzerland overwhelmingly rejected proposals to increase the central bank’s gold holdings in a referendum held on Sunday.
The yen has weakened broadly since the Bank of Japan unexpectedly expanded its stimulus program in late October. In contrast, the Fed wound up its asset purchase program in October and is weighing whether or not the economy is strong enough to start raising interest rates next year.
Japan’s Prime Minister Shinzo Abe dissolved parliament earlier this month, clearing the way for elections to be held on December 15 to seek a fresh mandate for his economic policies, which call for a weaker yen. The decision came after data showing that Japan’s economy unexpectedly fell into recession in the third quarter.
The dollar was steady against the euro, with EUR/USD at 1.2442, holding above last Monday’s two year lows of 1.2359.
The single currency remained under pressure after data on Friday showed that the annual rate of euro area inflation slowed to a five year low of 0.3% last month, down from 0.4% in October.
The weak data added to pressure on the European Central Bank to step up measures to spur growth and stave off the threat of deflation ahead of its upcoming policy meeting on Thursday.
The US dollar index, which measures the greenback against a basket of six major currencies, was at 88.34, not far from last week’s more than four-year highs of 88.52.