By Gregor Stuart Hunter SINGAPORE (Reuters) -The yen tumbled the most against the U.S. dollar in five months on Monday after Sanae Takaichi won the LDP leadership election at the weekend, setting the country on course for more expansionary fiscal policy and complicating the task facing the Bank of Japan. The yen sank 1.9% to 150.35 yen on the dollar, its biggest one-day slide since May 12, wiping out the gains it made in the past two months. Against the euro, the Japanese currency fell 1.7% to 176.19 yen, its weakest since the creation of the European single currency. "The coming days will be important to gauge her policies and from other potential members in her likely cabinet," Paul Mackel, global head of FX research at HSBC, wrote in a research note. "While we see room for the JPY to recover, there are limits given the domestic policy uncertainty." A former economic security and internal affairs minister with an expansionary fiscal agenda for the world's fourth-largest economy, Takaichi's victory puts her on course to become the country's first female prime minister. Her expansionist economic policy has reduced bets that the central bank will hike interest rates this month. Takaichi's win "will likely lead to some weakness in the yen," said Mahjabeen Zaman, head of FX Research at ANZ in Sydney. "There's a lot of political and fiscal uncertainty in the near term and maybe the BOJ may be cautious, despite the data supporting a little bit more of a hawkish stance," she said on a podcast. Long-dated Japanese government bonds sold off, with the 40-year JGB yield jumping 15.2 basis points to 3.538%. The yen swaps market on Monday now indicates a 41% likelihood of a rate hike by December, down from 68% on Friday. "We're in the eye of the storm," said Chris Weston, head of research at Pepperstone Group in Melbourne, as traders seek clues on how aggressively Takaichi will seek to ease fiscal policy. "If markets get a whiff that she's going to do Abenomics-lite, it could keep bond buyers out of the market," he said. "She does need to tread a careful path if she goes down that road. She'll be very cognizant of the UK's example." With many markets in Asia closed for holidays and liquidity thin in the region, the dollar index was last flat at 98.083, stabilising after recent losses. The dollar has weakened steadily against its major peers this year as traders attempt to gauge the economic impact of U.S. President Donald Trump's policies and attacks on the independence of the Federal Reserve. "We continue to think that the yen is cheap relative to U.S. dollar and expect the U.S. dollar to fall steadily over time as the Fed cuts rates and the BOJ hikes," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore. "This adjustment could take longer with the LDP election results and forthcoming policy shifts now more clear." Market activity signals that easing at the Fed's October meeting is a near-certainty, with Fed funds futures implying a 96.7% probability of a 25-basis-point rate cut, according to the CME Group's FedWatch tool. Speculators are also pricing a 72% chance that the government shutdown lasts beyond October 15, according to contracts on the betting website Polymarket. The euro stood at $1.1723, down 0.2% so far in Asia, after French Prime Minister Sebastien Lecornu on Sunday named Roland Lescure, a close ally of President Emmanuel Macron, as finance minister in a new government that political rivals threatened to topple quickly if it failed to break with past Macron policies. The kiwi reversed earlier losses and was last trading flat at $0.5832, reversing a six-day winning streak ahead of the Reserve Bank of New Zealand's meeting on Wednesday, where it is narrowly expected to cut its key interest rate by 25 basis points to 2.75%. The Australian dollar fetched $0.6603, up 0.1% in early trade. Sterling was changing hands at $1.3450, down 0.2% so far on the day. The offshore yuan traded at 7.1456 yuan per dollar, 0.1% weaker in early trade. (Reporting by Gregor Stuart Hunter; Editing by Shri Navaratnam and Kim Coghill)
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