Banknotes of Japanese yen are seen in this illustration picture taken September 22, 2022. REUTERS/Florence Lo/Illustration

By Rae Wee and Amanda Cooper

SINGAPORE/LONDON (Reuters) - The yen eased on Monday after Japanese Prime Minister Shigeru Ishiba announced his resignation over the weekend, while the dollar was on shaky ground as Friday's weak U.S. jobs report cemented expectations of a Federal Reserve rate cut this month.

The focus for markets will also be on French Prime Minister Francois Bayrou's confidence vote later in the day, which he is expected to lose. The announcement of the vote, which Bayrou himself called, has plunged the euro zone's second-largest economy deeper into political crisis.

Japan's Ishiba on Sunday said he would step down, ushering in a potentially lengthy period of policy uncertainty for the world's fourth-largest economy, the most heavily indebted industrialised nation.

The yen weakened sharply in Asia trade, leaving the dollar up by as much as 0.78% at one point before steadying to trade with a 0.26% gain on the day at 147.77.

The Japanese currency similarly slid to its lowest in more than a year against the euro, which rose 0.3% on the day to 173.25 yen.

Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy, such as Liberal Democratic Party veteran Sanae Takaichi, who has criticised the Bank of Japan's interest rate hikes.

"The probability of an additional rate hike in September was never seen as high to begin with, and September is likely to be a wait-and-see," Hirofumi Suzuki, chief currency strategist at SMBC, said of the BOJ's next move.

"From October onwards, however, outcomes will in part depend on the next prime minister, so the situation should remain live."

Japanese stocks surged while government bonds (JGBs) were steady, though yields on super-long JGBs hovered near record highs.

"With the LDP lacking a clear majority, investors will be cautious until a successor is confirmed, keeping volatility elevated across yen, bonds and equities," said Charu Chanana, chief investment strategist at Saxo.

"Near term, that argues for a softer yen, higher JGB term-premium, and two-way equities until the successor's profile is clear."

The yen hardly reacted to data on Monday showing Japan's economy expanded much faster than initially estimated in the second quarter.

SEPTEMBER FED CUT BAKED IN

The dollar struggled to recoup its heavy losses after falling sharply on Friday on data that showed further cracks in the U.S. labour market.

The nonfarm payrolls report showed U.S. job growth plunged in August and the unemployment rate increased to nearly a four-year high of 4.3%.

Investors ramped up bets of an outsized 50-basis-point rate cut from the Fed later this month following the release and are now pricing in a 10% chance of such a move, as compared to none a week ago, according to the CME FedWatch tool.

Sterling edged up 0.1% to $1.3534, having risen more than 0.5% on Friday, while the euro steadied at $1.1725, after hitting a more than one-month high on Friday.

The dollar index edged down 0.2% to 97.7, having tumbled more than 0.5% on Friday.

"(The payrolls report) has resulted in the dollar index falling back below support at the 98.000-level although the negative impact on the U.S. dollar is more modest than implied by the drop in short-term U.S. yields," MUFG currency strategist Lee Hardman said in a note on Monday.

"The weak nonfarm payrolls report for August has reinforced expectations that the Fed will resume cutting rates this month, and has even encouraged expectations that they could begin with a larger 50-bp rate cut similar to last September."

U.S. Treasury Secretary Scott Bessent on Friday called for renewed scrutiny of the Fed, including its power to set interest rates, as the Trump administration intensifies its efforts to exert control over the central bank.

President Donald Trump is considering three finalists to replace Fed Chair Jerome Powell, whom he has criticised all year for not cutting rates as he has demanded.

Elsewhere, the Australian and New Zealand dollars each rose 0.5% to $0.6585 and $0.5926, respectively.

(Additional reporting by Rae Wee in Singapore; Editing by Jamie Freed, Jacqueline Wong, Hugh Lawson and Harikrishnan Nair)