Most Asian currencies weakened on Tuesday, led by a sharp decline in the Japanese yen, which slipped to a one-year low. The move came as higher oil prices—driven by escalating unrest in Iran—weighed on regional sentiment, while new U.S. political and trade developments further unsettled investors.
The U.S. Dollar Index, which tracks the greenback against a basket of major peers, edged 0.1% higher after posting modest losses in the previous session. Dollar index futures were also up by 0.1% as of early Asian trading.
Yen sinks to one-year low on snap election speculation
The Japanese yen was the weakest performer in Asia, with the USD/JPY pair climbing 0.4% to 158.76, its highest level since January 2025. The currency came under renewed pressure following reports that Japanese Prime Minister Sanae Takaichi may call a snap general election as early as February.
Markets speculated that a strong election result could give Takaichi a firmer mandate to push ahead with expansionary fiscal policies, reinforcing expectations of prolonged yen weakness.
Trump tariff threat and Iran unrest drive risk aversion
Risk appetite across Asian markets remained fragile after U.S. President Donald Trump warned that Washington could impose a 25% tariff on countries “doing business” with Iran. While details on timing and scope were not provided, the comments were enough to heighten trade uncertainty.
Oil prices continued to rise after deadly anti-government protests in Iran stoked fears of supply disruptions. Trump also warned of potential military action, adding to geopolitical risk premiums in global markets.
Analysts at MUFG noted that Asian currencies have been pressured by rising energy costs, alongside geopolitical developments in Iran and Venezuela. They added that countries such as Turkey, the United Arab Emirates, and to a lesser extent Russia and India maintain notable trade ties with Iran, increasing their exposure to oil-driven volatility.
Within Asia, the South Korean won weakened further, with the USD/KRW pair rising 0.4% for a seventh consecutive session. The Indian rupee also softened, with USD/INR up 0.1%, while the Singapore dollar remained broadly unchanged.
In China, the onshore yuan (USD/CNY) was little changed, while the offshore yuan (USD/CNH) edged slightly higher. The Australian dollar traded largely flat against the U.S. dollar.
Fed independence concerns weigh on sentiment
Investor caution was also fueled by growing concerns over the independence of the Federal Reserve, after the Trump administration opened a criminal investigation into Fed Chair Jerome Powell related to testimony on renovation work at the central bank’s headquarters.
Powell defended the Fed’s autonomy, stressing that policy decisions would continue to be guided solely by economic data and the institution’s mandate. Several former Fed chairs and senior officials publicly expressed support for him.
Analysts at ING said markets have entered a wait-and-see phase as investors assess the broader implications of rising political pressure on the central bank.
Despite the dollar’s limited gains, Asian currencies struggled to find support, as traders remained focused on U.S. political risk, trade uncertainty, and elevated oil prices. Attention is now turning to upcoming U.S. economic data and potential signals from the Federal Reserve, which could reshape interest rate expectations in the weeks ahead.
