The yen fell to a 20-month low against the dollar on Wednesday after Japan swore in a new prime minister who has promised aggressive stimulus measures to rein in deflation, while U.S. stocks and oil rose in thin trading.
The dollar rose to a 20-month high of 85.48 yen on trading platform EBS following the swearing-in of Shinzo Abe as premier. Traders eyed the dollar's 2011 high of 85.53 yen as the next target.
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Abe is calling for a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and weaken the yen. He is pressuring the Bank of Japan to adopt a 2 percent inflation target that would auger for a weaker currency, threatening changes at the central bank if his wishes are not met.
The euro rose as high as 112.92 yen on EBS, a 16-month high, and was last at 112.68 yen, up 0.8 percent. The euro was at $1.3244 against the dollar, up 0.5 percent.
"The election of Abe has had a galvanizing effect on the dollar/yen exchange rate and he has been able to accomplish more in two months of jawboning than the BoJ has... over the past several years," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
U.S. shares were slightly higher in post-Christmas trading with Congress likely to resume negotiations to avoid the "fiscal cliff," a series of $600 billion in spending cuts and tax hikes that would slow the U.S. economy sharply unless lawmakers take action.
A U.S. official said on Tuesday that President Barack Obama may return to Washington from his Hawaiian holiday as early as Wednesday evening to resume talks.
The odds are increasing that Congress will not come to an agreement before the end of the year, however, leaving a series of big decisions to early 2013, when tax rates are scheduled to rise for most Americans. Economists warn that the world's largest economy could fall into recession.
There is some concern that the impending tax hikes cut into holiday spending in the United States. Holiday-related sales were up 0.7 percent from October 28 through December 24, compared with a 2 percent increase in 2011, according to MasterCard Advisors SpendingPulse.
Many markets remain closed following Christmas. European exchanges were largely shuttered, and Hong Kong and Australia were also closed.
The Dow Jones industrial average was up 10.09 points, or 0.08 percent, at 13,149.17. The Standard & Poor's 500 Index was down 0.95 points, or 0.07 percent, at 1,425.71. The Nasdaq Composite Index was down 3.05 points, or 0.10 percent, at 3,009.55.
U.S. single-family home prices rose in October for the ninth month in a row. The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis, stronger than the 0.5 percent rise forecast by economists polled by Reuters.
Ten-year U.S. Treasury notes rose 4/32 of a point in price to yield roughly 1.7598 percent. The U.S. bond market was closed on Tuesday for Christmas.
Brent crude climbed above $110 per barrel on Wednesday, hitting a two-month high, with investors hoping for a last-minute deal to avoid a U.S. fiscal crisis. U.S. crude futures gained $2.39, or 2.8 percent, to $91.
The weaker yen has bolstered hopes for better earnings from Japanese companies and underpinned the Nikkei, which has gained some 18 percent since mid-November, when the election was scheduled. The yen has lost nearly 8 percent against the dollar in the same period.
The Nikkei <.N225> closed at a nine-month high with a 1.5 percent gain on Wednesday.
Minutes of the BOJ's policy-setting meeting in November, released on Wednesday, showed that some board members said the central bank must act decisively, without ruling out any policy options, if the outlook for the economy and prices worsens further.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was little changed. Shanghai shares were flat, but stayed in positive territory on the year after a 2.5 percent jump on Tuesday erased 2012 losses. It is set for a first annual gain in three years.
(Additional reporting by Ayai Tomisawa and Dominic Lau in Tokyo and Masayuki Kitano in Singapore; Editing by Richard Borsuk and Dan Grebler)