* Market cheers opposition win in Japan elections
* U.S. Midwest business on cusp of growth in August
* China stocks drop 6.7 percent amid risk aversion
* Canada dollar falls as oil drops 3.8 pct, below $70/bbl (Adds details, updates prices)
By Nick Olivari
NEW YORK, Aug 31 (Reuters) - The yen rose broadly on Monday, touching a seven-week high against the dollar, buoyed by a decisive opposition victory in Japanese elections and concerns about a global economic recovery.
The yen received a boost after a landslide win on Sunday by the Democratic Party of Japan, or DPJ, sparked hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook.
A 6.7-percent slide in the Shanghai Composite Index shook investors who have been looking to China to lead the way in a global recovery. A decline in risk tolerance sent investors flocking to the yen for safety, weighing on higher-yielding currencies like the Australian dollar.
The Canadian dollar tumbled after oil prices slid nearly 4 percent, ending below $70 a barrel.
"We had a pretty important change in the Japanese political landscape over the weekend," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.
"That usually is greeted by an element of optimism and that's why it has been generally supportive for the Japanese yen so far ... This morning, sentiment was dominated by another strong and sharp sell-off in Chinese stocks," he added. "The Japanese yen was already ... on the stronger side. Then it got a further boost on the back of risk aversion."
In late afternoon New York trade, the dollar was down 0.6 percent at 93.05 yen after earlier hitting a low of 92.53 yen, according to Reuters data, its weakest level since mid-July. The dollar lost 1.7 percent against the yen in August at current prices, matching July's monthly loss.
Also losing ground against the yen, the Canadian dollar fell 0.6 percent, the Swiss franc lost 0.3 percent, the Australian dollar fell 0.1 percent and the pound lost 0.3 percent, according to Reuters data.
The euro lost 0.3 percent to 133.41 yen while it rose 0.3 percent against the dollar to $1.4337.
CHICAGO PMI
The dollar gave up gains against the euro to hit session lows after data showed business activity in the U.S. Midwest picked up at a faster pace than expected. The Chicago purchasing managers index soared to a reading of 50.0 in August from 43.4 in July.
"The Chicago PMI report is further indication that the U.S. economy is starting to improve," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Overall, the data eased risk aversion a little bit, with positive data negative for the dollar and yen."
Marc Chandler, senior currency strategist at Brown Brothers Harriman, said in a note to clients that while the euro had rallied a full cent off its earlier lows, the pre-weekend high of $1.4388 and last week's high around $1.4406 appeared safe for now with rejigging of portfolios and hedges expected.
The U.S. dollar rose 0.2 percent against its Canadian counterpart to C$1.0940.
UNCERTAINTY AHEAD
Trading was quiet, however, with London markets closed for a public holiday and the focus on key events later in the week, including a European Central Bank policy meeting on Thursday and U.S. non-farm payrolls figures due on Friday.
Analysts said investors may be cautious about buying the yen too aggressively, given the uncertainty that will accompany the advent of a new government in Japan as well as concerns over the country's high levels of government debt.
A Reuters survey showed the DPJ's stance on fiscal discipline remains a source of concern, along with its stance on diplomacy, including U.S.-Japan relations. The DPJ plans to raise 16.8 trillion yen ($181.4 billion) over four years to fund its economic measures.
In other trading, sterling rebounded to last trade 0.1 percent higher against the dollar at $1.6283. But for the month of August, sterling was down 2.6 percent -- the biggest monthly drop since December 2008.