* Market cheers opposition win in Japanese vote
* Chinese stocks drop 6.7 percent, stoking risk aversion
* Dollar gains versus sterling, Aussie, Canadian dollars
By Wanfeng Zhou
NEW YORK, Aug 31 (Reuters) - The yen rose to a 7-week high against the dollar and gained versus other currencies on Monday, buoyed by a decisive opposition victory in Japanese elections and as declines in global equities stoked risk aversion.
A 6.7 percent slump in Chinese stocks sent investors flocking to the yen for safety. The U.S. dollar, another safe-haven currency, also rose against perceived higher-risk currencies, such as sterling and the Australian dollar.
A landslide win Sunday by the Democratic Party of Japan (DPJ) sparked hopes that new policies will support consumer spending in an economy trapped in deflation and haunted by a weak growth outlook.
While the outcome lifted the Japanese currency, traders said gains could be limited on jitters over what a new government may herald.
"There's a bit of risk aversion in the market this morning, really on the back of (the fall in) Chinese equities," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.
Trading was quiet, however, with U.K. markets closed for a public holiday. The focus is 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.
In early New York trading, the dollar was down 0.3 percent at 93.16 yen, having earlier hit a low of 92.53 yen, according to Reuters data, its weakest level since mid-July. The euro lost 0.5 percent to 133.05 yen.
The euro dipped 0.1 percent to $1.4287. Provisional figures released Monday showed euro zone inflation fell by 0.2 percent year-on-year in August, slightly less than the 0.3 percent decline forecast by economists.
Chinese equities slid to a three-month closing low Monday and recorded their second biggest monthly loss in 15 years, weighing on U.S. stocks and pushing oil prices to below $71 per barrel.
The oil-sensitive Canadian dollar underperformed, with the U.S. dollar rising 1.4 percent to C$1.1067.
Canada's economy shrank at an annual rate of 3.4 percent in the second quarter, a slightly sharper contraction than expected, following a 6.1 percent downturn in the first quarter, Statistics Canada said Monday.
UNCERTAINTY AHEAD
Among riskier currencies, the Australian dollar fell 0.7 percent against the dollar to $0.8362, while sterling declined 0.3 percent against the dollar to $1.6226.
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 Democratic Party of Japan's stance on fiscal discipline remains a source of concern for the markets, along with its stance on diplomacy, including U.S.-Japan relations.
"Whether (DPJ leader Yukio Hatoyama) can succeed in transforming the Japanese society and economy remains to be seen," said Boris Schlossberg, director of currency research at GFT Forex in New York.
"Nevertheless, the near-term impact of the DPJ win could translate into further gains for the yen."
Going forward, investors may also turn a wary eye to political developments in Germany ahead of a general election on Sept. 27. Chancellor Angela Merkel's party suffered losses in regional elections on Sunday.