Dollar surges on Japan vote, U.S. budget weighs

A win by Japan's conservative Liberal Democratic Party lifted the dollar to a 20-month high against the yen on Monday while European shares edged lower, weighed down by U.S. budget uncertainty.

The LDP surged back to power in a landslide election victory on Sunday, giving Japan's next prime minister, Shinzo Abe, a chance to implement a radical economic strategy calling for "unlimited" monetary easing and huge public works spending.

Investors were also focused on the U.S. year-end deadline to avoid the steep tax hikes and spending cuts, the "fiscal cliff". A new proposal for tax hikes from U.S. Republican House Speaker John Boehner on Sunday was still some way from the position of President Barack Obama. "In the latest twist and turn, (Boehner) has suggested an increase in taxes for income over $1 million. While positive, this is still a much higher level of income than the $250,000 proposed by the Obama camp," Michala Marcussen, economist at Societe Generale, said in a note.

"As such, the divide between the two camps still remains significant."

In the currency markets the LDP triumph saw the dollar hit 84.48 yen, its highest level against the Japanese currency since April 2011. The euro jumped to around 111.30 yen on the victory to be near its year's high of 111.43 yen.

The Nikkei stock average <.N225> to a 8-1/2-month closing high on expectations Japanese firms will have much better export earnings from the weaker yen.

But Asia equity markets succumbed to profit-taking from last week's rally and edged lower leaving the MSCI world equity index <.MIWD00000PUS> little changed at 336.49 points.

European shares were little changed the open, struggling to keep alive a month-long rally with the FTSE Eurofirst 300 index <.FTEU3> off 0.1 percent.

London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX ranged between 0.1 percent lower and 0.3 percent higher.

"I think we're heading for a very flattish day with thin volumes. In the week before Christmas you see that trading volumes evaporate quite substantially," Gerhard Schwarz, strategist at Baader Bank, said.

In oil markets traders were drawing support from a brighter economic outlook for top energy consumer China, although the market remains skittish because of the impact a failure to reach a budget deal in the U.S. would have on future demand.

U.S. crude was up 0.25 percent to $86.92 a barrel and Brent inched up 0.15 percent to $108.35.

(Reporting by Richard Hubbard. Editing by Jeremy Gaunt)