By Eric Burroughs
TOKYO, July 30 (Reuters) - The yen hit a three-month high against the euro in early trade on Monday as the sell-off in global equity and credit markets prompted investors to cut back on risky positions such as carry trades.
The yen shrugged off a crushing defeat for Japanese Prime Minister Shinzo Abe's ruling camp in upper house elections on Sunday, even as the conservative said he intended to stay in his post. [nT227312]
Analysts said the fallout from the Japanese election was negative for the yen but would take a back seat to worries about a further sharp fall in stocks and corporate bonds following more heavy losses on Wall Street late last week.
"Abe said he won't step down, so the impact on monetary policy is limited," said Masafumi Yamamoto, a currency economist at Nikko Citigroup. "The yen is still very sensitive to the risk reduction story, and stock markets will be key this week."
High-yielding currencies like the Australian and New Zealand dollars came under fresh selling pressure as investors pulled funds out of riskier assets following another sharp fall in U.S. stocks and corporate bonds late last week.
The yen has jumped as investors reverse positions using the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding assets in the carry trade.
The dollar fell 0.3 percent from late U.S. trade on Friday to 118.25 yen <JPY=>, holding above the 3-1/2-month low of 118.02 yen struck last week.
The euro fell 0.3 percent to 161.21 yen <EURJPY=R> after touching 160.64 yen, the weakest since late April.
The wave of risk reduction also prompted investors to take profits in the Australian and New Zealand dollars, which have surged this year from central bank credit tightening or expectations of more tightening to come.
Yamamoto at Nikko Citigroup said Japanese individual investors were looking to buy foreign currencies and assets on any further drop against the yen but they may wait until financial markets settle down.
The Aussie edged up slightly to $0.8516 <AUD=D4>, rebounding from a one-month low of $0.8470 hit in early trade. The kiwi fell 0.6 percent to $0.7603 <NZD=D4> but also recovered from a one-month low of $0.7561.
The Aussie hit a two-month low against the yen near 100.00 yen <AUDJPY=R> and has shed more than 7 percent after striking a 16-year high on July 20, while the kiwi has tumbled nearly 9 percent versus the yen in less than a week.
"While the uncertainty over Japan's political situation may see some yen weakness early in the week, we think carry trade unwinding will continue to be the main driver of currency markets this week," said Bank of New Zealand currency strategist Danica Hampton.
(Additional reporting Kazunori Takada in Wellington)