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Dollar tumbles against yen after Japan sales tax hike delay

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The U.S. dollar hit its lowest level in two weeks against the yen on Wednesday after Japan delayed a sales tax hike for longer than expected, raising concerns about the lack of Japanese monetary stimulus to halt the yen's rise.

Japanese Prime Minister Shinzo Abe announced a delay in a sales tax increase of 2-1/2 years, putting plans for fiscal reform on the back burner amid weakness in the economy.

Analysts said the delay was longer than market participants had expected, raising concerns that Japan was also in no hurry to weaken the yen currency through monetary stimulus.

"The delay of the sales tax was priced in, but markets did not expect such a long delay, and that's why we had such an exaggerated reaction," said Kathy Lien, managing director at BK Asset Management in New York.

The dollar sank 1.5 percent against the yen to a two-week low of 109.06 yen, continuing to ease from a one-month high of 111.43 yen touched on Monday. The euro was last up 0.54 percent against the dollar at $1.119.

The dollar pared losses against the euro, yen, and Swiss franc after the Institute for Supply Management (ISM) said its index of national factory activity came in at 51.3 for May. That beat expectations for a drop to 50.4 according to a Reuters poll of economists.

Commerce Department data showed U.S. construction spending, however, recorded its biggest decline in more than five years of 1.8 percent in April as outlays fell broadly, which could prompt economists to lower their second-quarter growth estimates.

Expectations for a June interest rate increase from the Federal Reserve rose after the ISM data. Fed funds futures suggested traders saw a 21 percent chance the U.S. central bank would hike rates at its June meeting, up from 17 percent before the ISM reading, according to data from CME Group's FedWatch program.

Analysts said lingering doubts about the likelihood of a June rate hike given recent softness in U.S. economic data also weighed on the dollar.

"June is complicated," said Steven Englander, managing director and global head of G10 FX strategy at Citigroup in New York. "A lot depends on payrolls," he said in reference to Friday's U.S. May employment report.

The dollar index, which measures the greenback against a basket of six major rivals, was last down 0.53 percent at 95.39.