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FOREX-Yen rises in choppy trading, euro on defensive

* Yen strengthens despite Abe win as Nikkei dips

* Euro inflation expectations hit new low

* Dollar holds ground ahead of Fed meeting

* Oil recovers 1 percent

By Jamie McGeever

LONDON, Dec 15 (Reuters – The yen rose on Monday as financial markets shrugged off Japanese Prime Minister Shinzo Abe’s widely expected election win, while a new low for euro zone inflation expectations kept the bloc’s currency on the defensive.

Japan’s Nikkei stock average fell 1.6 percent. Many market participants, particularly foreign investors, sell the yen to hedge their equities positions, so the Japanese currency tends to feel upward pressure whenever stocks slip.

A big victory for Abe’s coalition in Sunday’s general election was a boost for his reflationary economic policies – known as “Abenomics” – which are likely to weigh on the yen in the long term. But the fall in shares lifted the currency.

The euro extended losses against the yen as investors digested the latest fall in the European Central Bank’s favoured measure of inflation expectations, increasing the likelihood of aggressive policy easing from the ECB early next year.

“The market was expecting this (Abe’s victory) to support stocks and dollar/yen … However it seems like this is more of an early morning shakeout,” said Josh O’Byrne, G10 currency strategist at Citi in London.

The dollar was down a third of a percent at 118.38 yen , after dropping as low as 117.78 yen. It remained above a two-week low of 117.44 yen touched last Thursday, but well away from a seven-year high of 121.86 yen set one week ago.

The euro was also down around a third of a percent against the Japanese currency at 147.27 yen, and down 0.2 percent against the dollar at $ 1.2435.

Five-year/five-year forwards, the ECB’s preferred measure of inflation expectations, fell to a new low of 1.69 percent, weighed down by the recent collapse in oil prices.

Oil rebounded 1 percent on Monday but has fallen more than 40 percent this year, making the ECB’s task of lifting inflation – currently 0.3 percent – back to its target of below but close to 2 percent much more difficult.

Other currency moves were fairly limited, with the dollar still broadly stronger following last week’s widespread financial market volatility.

The main focus for currency markets this week will be the Federal Reserve’s last policy meeting of 2014 on Tuesday and Wednesday. A statement and forecasts are expected on Wednesday at 2:00 p.m. EST (1900 GMT), followed by Fed chief Janet Yellen’s press conference half an hour later.

Yellen is seen as erring on the dovish side rather than risking a signal to jittery financial markets that the first interest rate hike will be too soon. The U.S. economy may be chugging along relatively well, but weakness in the euro zone, Japan and China adds to the risk of a U.S. slowdown.

“There’s a focus on the Fed – the market is thinking about oil, but the medium term will be more dependent on monetary policy and not market volatility. Into year-end though, there is some incentive to close positions and perhaps there is a shorter threshold for pain,” Citi’s O’Byrne said.

(Additional reporting by Tomo Uetake in Tokyo and Ian Chua in Sydney; Editing by Tom Heneghan and John Stonestreet)

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