The yen dropped to a 20-month low against the US dollar on Monday after Japan's Liberal Democratic Party won a landslide election victory that leaders promise will usher in aggressive monetary easing policies to weaken the currency. Former Prime Minister Shinzo Abe returns to power with the LDP's victory. He campaigned on a platform to boost the moribund economy with hyper-easy monetary policy and big fiscal spending to beat deflation, a recipe for weakening the yen that gives Tokyo an export advantage in international markets.

The euro rose against the yen as well, but saw its gains on the US dollar undermined by European Central Bank President Mario Draghi after he reiterated concerns over slow growth of Europe's economy. In late New York trade, the greenback was up 0.46 percent to 83.85 against the yen. In the immediate wake of the election, the US dollar reached 84.48 yen, its best level since April 2011.

The euro climbed 0.43 percent to 110.35 yen but fell back from its 8-1/2-month high of $1.3191 to trade at $1.3160, off 0.01 percent against the US currency. "Just looking at the euro's movement's today, it is coming off the highs after Draghi's comments about growth. Still, it is in an upward trend channel," said Eric Viloria, senior currency strategist at FOREX.com in New York.

Year-to-date, the euro is up 1.66 percent against the greenback and 10.84 percent against the yen. The US dollar is up nearly 9 percent on the yen with two weeks to go in the year. There were competing forces tugging at the euro on Monday. A factor leading to the weakness was Draghi saying the medium-term outlook for the euro zone economy remained "challenging." Weak demand is expected to extend into 2013 and only a gradual recovery is forecast toward the end of that year while interest rates are expected to continue at record lows.

Strengthening the euro against the US dollar was Richmond Federal Reserve Bank President Jeffrey Lacker, who said he expects it will be another three years until the US unemployment rate drops to 6.5 percent. That means monetary policy is expected to remain in the zero to 0.25 percent range through 2015, conditions that weaken the buying power of the US dollar. Analysts expect the prospect of ultra-loose monetary policy in Japan to weaken the yen further in coming weeks, depending on the pace of policy change. However, given that bets against the yen are already hefty, losses could be limited. The Bank of Japan is scheduled to meet on Wednesday and Thursday. It will most likely increase its asset-buying and lending program, currently at 91 trillion yen, by another 5-10 trillion yen, sources familiar with the bank's thinking said.

Copyright Reuters, 2012