FOREX-Yen slips to 7-week low vs euro, dollar holds to gains
* Yen weakens before Japan upper house election
* Dollar climbs, no surprises from Bernanke
* U.S. Treasury yields lower, to check sharp dollar gains
LONDON, July 18 (Reuters) - The yen fell on Thursday, dropping to a seven-week low against the euro, as hedge funds sold the currency before Japanese upper house elections on Sunday that would strengthen Prime Minister Shinzo Abe's position. Opinion polls show Abe's ruling bloc on track for a big win lending a rare bout of political stability to Japan. That will give Abe more freedom to push forward his agenda to revive the economy through aggressive monetary easing and hefty government spending. All of which is likely to keep the yen under pressure. The euro rose to a seven-week high of 131.47 yen while the dollar gained 0.7 percent to 100.35 yen. Investors such as hedge funds were cited as buyers of dollar/yen with stop-loss buy orders layered at 100.50 and 101.00 yen, traders said. "Anything that will strengthen Abe's position will be positive for the Nikkei and dollar/yen," said Beat Siegenthaler, currency strategist at UBS. "The yen has not been the focus of late, but this could embolden investors and have the potential to trigger weakness." Morgan Stanley said in a note that a break above 101.55 yen for dollar/yen could signal a return to the upward trend. The dollar also held on to broad gains as investors bet U.S. economic data would support plans by the Federal Reserve to move away from ultra-loose monetary policy soon. The dollar had been boosted by higher U.S. yields but doubts over when the Fed will start withdrawing stimulus has kept it clear of three-year highs struck on July 9. In Congressional testimony on Wednesday, Fed Chairman Ben Bernanke said the central bank still expected to start scaling back its bond purchase programme later this year, but left open the option of altering that plan if the economic outlook changed. The dollar index edged up 0.1 percent to 82.792, staying above a three-week low of 82.342 set on Wednesday. The euro was slightly lower at $1.3105, while sterling cut earlier losses to trade higher at $1.5216 after UK retail sales rose in June. "We are bullish dollar but we are getting mixed signals from the Fed," said Peter Kinsella, currency strategist at Commerzbank. "Fed tapering will be very data-dependant and if we get good jobs data next month, then we can expect stimulus withdrawal by September. Otherwise expectations of tapering will be pushed back to December. This uncertainty should keep it rangebound." Bernanke is seen likely to stick to Wednesday's themes when he testifies to the Senate Banking Committee later on Thursday.
(Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)