REUTERS
 
The dollar on Tuesday climbed to highs against the yen last seen in 2007 after Japan's stock index surged on hopes Japanese Prime Minister Shinzo Abe may delay a planned sales tax increase.
 
The safe-haven yen typically struggles when Japanese stocks rise because investors often sell the Japanese currency and seek riskier assets in a bull market.
 
Pressure appeared to be building on Abe to call a snap election and postpone the tax hike. The last hike in April, which was part of a plan to rein in public debt, sent Japan's economy into a slump.
 
"The delay in sales tax hike is good news for the economy and a big boost for stocks," said Richard Franulovich, senior currency strategist, at Westpac Securities in New York. "That has weighed on the yen because of the negative correlation."
 
While a postponement of the sales tax would boost sentiment toward Japanese stocks in the near term, in the medium to longer term it is unlikely to be welcomed by investors, as it would delay fiscal reforms.
 
The dollar hit 116.09 yen, its highest since October 2007. It was last trading at 115.29, up 0.6 percent on the day. The greenback has gained nearly 10 percent against the yen so far this year.
 
The yen had already weakened after the Japanese central bank on Oct. 31 said it would expand its huge stimulus program. The greenback has surged over 6 percent since then against the Japanese currency.
 
Elsewhere, the Swiss franc hit a 26-month high against the euro, fuelling talk the Swiss National Bank might buy euros to honor its 2011 promise to keep the euro above 1.20 francs. The euro was little changed at $1.2030.
 
Currency traders looked ahead to this week's batch of U.S. data, including retail sales and consumer sentiment, that may underscore America's brighter economic outlook relative to Europe and Japan.
 
The dollar did weaken a little after U.S. non-farm payrolls data on Friday failed to live up to more optimistic expectations, hitting 113.86 yen on Monday.
 
The euro on Tuesday was up 0.6 percent against the dollar at $1.2493 after trading close to a two-year trough of $1.2358 hit last week.