By Gregor Stuart Hunter

SINGAPORE, Jan 14 (Reuters) - The yen fell to its weakest level in a year-and-a-half on Wednesday, as investors considered the possibility of a snap election that could pave the way for fiscal stimulus while an auction of government debt received a cautious market response.

The yen slipped as much as 0.2% to 159.45 yen per dollar, its weakest against the greenback since July 2024. A recovery from its lows faltered after an auction of five-year Japanese government bonds attracted slack demand. The currency was last trading flat at 159.215 yen per dollar.

The auction "saw cautious bidding amid speculation about a possible lower house dissolution, concerns over fiscal expansion, and heightened volatility," said Shoki Omori, chief desk strategist for rates and FX at Mizuho in Tokyo. "Investors demanded higher yields and avoided aggressively adding positions."

The Yomiuri newspaper reported on Wednesday that Japanese Prime Minister Sanae Takaichi is considering snap lower house elections on February 8. The report came as the Reuters Tankan poll showed Japanese manufacturers' confidence slipped to a six-month low in January, although still in positive territory.

As the yen approaches 160 to the dollar, traders are on alert for possible intervention by Japanese authorities to defend the currency.

"While verbal warnings remain the first line of defence, the absence of clear guidance on the timing, scale, or trigger for intervention is keeping the speculative pressure against the JPY elevated," analysts from DBS wrote.

The U.S. dollar held steady near a one-month high after U.S. CPI data that was broadly in line with estimates, firming up expectations that the Federal Reserve will remain on hold later this month despite unprecedented pressure from the White House to lower interest rates.

The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, was last flat at 99.154, after retracing losses from Monday prompted by U.S. President Donald Trump's threat of a criminal indictment against Fed Chair Jerome Powell.

Global central bank chiefs and top Wall Street bank CEOs lined up in support of Powell on Tuesday.

"There's a very loud chorus of opinion coming from politicians, former Fed chairmen and other officials that Fed independence is sacrosanct and cannot be interfered with," said Brian Martin, head of G3 Economics at ANZ in London.

"It risks having adverse consequences of higher inflation, higher funding costs for the government and more volatility in economic activity," he said on a podcast.

"Markets are erring on the side of caution: They're not jumping to conclusions, and I think that sense will prevail and that the independence of the Fed will be protected."

On Tuesday, data showed U.S. consumer prices increased 0.3% in December compared to the previous month, cementing expectations the Federal Reserve will leave interest rates unchanged this month.

Fed funds futures are pricing an implied 98.3% probability the Fed will leave rates unchanged at its next meeting that concludes on 28 January, compared to 95.6% a day earlier, according to the CME Group's FedWatch tool.

"Indirect attacks on the Fed’s independence aren’t likely to roil the financial markets in the U.S., so long as inflation there remains under control," wrote analysts from Capital Economics.

Volatility in most currency pairs was subdued in early Asian trading ahead of a possible Supreme Court ruling on the legality of Trump's emergency tariffs.

"It could rule them legit, and if so we just move on. We suspect they will be struck down, and we'll probably still just move on," analysts from ING wrote in a research report.

"This Treasury market is showing a remarkable capacity to just not care too much about stuff."

Against the Chinese yuan trading offshore in Hong Kong, the U.S. dollar was flat at 6.9752 yuan after the release of trade data for December that showed Asia's biggest economy ending the year with a record surplus of nearly $1.2 trillion.

The Australian dollar was last up 0.2% at $0.6698, while the New Zealand dollar climbed 0.2% at $0.5746.

The euro was last flat at $1.1644, while the British pound was last up 0.1% at $1.3442.

Bitcoin gained 1.4% to $95,390.91, its highest level in two months, while ether surged 4.2% to $3,342.43, its strongest since 10 December.

(Reporting by Gregor Stuart Hunter; Editing by Stephen Coates and Neil Fullick)