Dollar hits new 20-month high, tops 85 yen

The dollar rose past 85.00 yen in early Asian trade on Wednesday on expectations that the Bank of Japan (BoJ) would take more monetary easing steps under pressure from the incoming government.

The greenback was at 85.12 yen around 0040 GMT after topping 85.00 yen for the first time since April 2011. The dollar was at 84.78 yen in Tokyo afternoon trade on Tuesday.

The lower yen gives a respite to Japanese exporters as the strong currency erodes their revenue when repatriated.

The Japanese currency has been declining as incoming prime minister Shinzo Abe, whose Liberal Democratic Party won a landslide national election last week, steps up pressure on the central bank to take bold easing steps.

The dollar is likely to trade in a 84.50-85.30 range, with activity subdued amid fewer market participants due to the year-end holiday season, said Osao Iizuka, head of FX trading at Sumitomo Mitsui Trust Bank.

"The bottom line is that the dollar will likely rise further next year amid expectations that the Fed will exit loose monetary policy earlier than the BoJ", he told Dow Jones Newswires.

Abe is to be named prime minister later Wednesday, after he swept to power on a hawkish platform of getting tough on diplomacy while fixing the economy with active fiscal spending and monetary easing.

On Sunday he threatened to change a law guaranteeing the central bank's independence if it did not agree to set a two-percent inflation target, in a bid to drag the country out of the deflation that has haunted its economy for years.

Abe, who previously served as prime minister from 2006 to 2007, is expected to name Taro Aso, another former prime minister in Japan's revolving-door political system, as finance minister and his own deputy, reports said.

As prime minister in 2008-2009, Aso launched a series of economic stimulus packages worth hundreds of billions of dollars to prop up Japan's long-struggling economy.

Mizuho Securities chief market economist Yasunari Ueno warned the BoJ's monetary policy was being pushed towards the point where trust in the yen could fall apart amid political pressure for measures to cause inflation in a country which has been in deflation for years

"I wonder if this recent yen weakening is gradually changing in nature to a 'bad yen weakness' due to the damage done to trust in the yen on the back of a mere correction from excessive yen strength," he said.

The yen rose to a postwar high of 75.32 to the dollar last year backed by "safe-haven" buying in the face of the eurozone debt crisis and slowing global economy.