By Amanda Cooper LONDON (Reuters) -The yen headed for its steepest weekly drop in a year on Friday, as the chances of a near-term rate hike faded, while the euro was rooted near two-month lows by political crisis in France. The yen edged up 0.2% to 152.7 per U.S. dollar but was still close to its weakest since mid-February, heading for a 3.5% drop in the week, its biggest decline since last October. Its drastic drop has been triggered by concerns that the Bank of Japan may not hike interest rates again this year after fiscal dove Sanae Takaichi's surprise victory to lead the ruling party, stoking worries of Japanese authorities needing to step in to support the yen. Japanese Finance Minister Katsunobu Kato said on Friday that the government was concerned about excessive volatility in the foreign exchange market. Takaichi said on Thursday she did not want to trigger excessive declines in the yen. "The Ministry of Finance is very sophisticated, they're very experienced, and I think they would use verbal intervention beforehand. And in a way, I think they have," Rabobank chief strategist Jane Foley said. Takaichi said on Thursday that the BOJ is responsible for setting monetary policy but that any decision it makes must align with the government's goal. She looked set to become Japan's first female prime minister in a parliament vote that was expected on October 15. But the date will be likely pushed back after the Liberal Democratic Party's junior coalition partner Komeito pulled its support, breaking their 26-year-old alliance. Traders are currently pricing an about 45% chance of a rate hike from the BOJ in the December meeting and are only fully pricing in a 25-basis-point hike in March. FRENCH DRAMA DENTS EURO The euro headed for its biggest weekly decline in 11 months, but managed to edge up 0.2% to $1.1586, near its lowest for two months. Political turmoil in France has weighed heavily on the single currency in the last week. President Emmanuel Macron is searching for yet another prime minister, hoping his next pick – the sixth in under two years – can steer a budget through a legislature riven by crisis. The political paralysis has made it deeply challenging to pass a belt-tightening budget and has made investors increasingly worried about France's yawning deficit, on top of evidence of slowing momentum in other key economic engines such as Germany. "The data from Germany's not good, and therefore I think that makes the euro a little bit more susceptible to wobbles on the French news," Rabobank's Foley said. As a result, the dollar index, which measures the U.S. currency against six others, neared two-month highs around 99.24 and headed for a weekly rise of 1.7%, its biggest in a year. "The recent dollar rally has gone against market positioning and prompted a partial covering of USD shorts," said Chris Weston, head of research at Pepperstone. "There remains a high degree of scepticism that the USD can materially push through 100, a level in the dollar index that was quickly reversed in May," he said in a note. With the U.S. government shutdown continuing and little to no economic data for investors to parse through for clues on the path the Federal Reserve is likely to take, markets are keeping an eye on comments from policymakers. The influential New York Federal Reserve President John Williams signalled on Thursday he would be comfortable with cutting interest rates again, despite some policymakers' qualms about rising inflation that suggest such a decision would not be easily made. Traders are pricing in a 95% chance that the Federal Reserve cuts rates by 25 bps at its October meeting, while the odds of an additional cut in December have dropped to 80%, from 90%, in the past week, according to the CME Group's FedWatch Tool. (Additional reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong, Kim Coghill and Emelia Sithole-Matarise)
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