Dollar Steadies After Strong Rally; Yen Struggles as Political Shifts Hit Markets
The U.S. dollar paused on Thursday after a powerful rally this week that has positioned it for its best weekly performance in nearly a year. The move was supported by a weakening Japanese yen, which has struggled amid a change in Japan’s political leadership.
Investors have been grappling with political uncertainty in both Japan and France, alongside a prolonged U.S. government shutdown, all of which have weighed on market sentiment. Many traders have sought safety in traditional havens such as gold.
Yen Slides on Takaichi’s Leadership Win
The yen has faced volatility following the election of Sanae Takaichi as leader of Japan’s ruling Liberal Democratic Party, putting her on track to become the country’s first female prime minister. Her expected support for increased government spending and loose monetary policy has fueled expectations of continued yen weakness.
The currency last traded around 152.55 per dollar, slightly firmer after sliding to an eight-month low of 153 overnight. The yen has dropped more than 3% this week, marking its worst performance since September 2024.
Analysts say the dollar’s surge against the yen has been “relentless,” with few signs of reversal. According to Carol Kong, a strategist at Commonwealth Bank of Australia, confirmation of Takaichi as prime minister and the upcoming Bank of Japan (BOJ) meeting could trigger further yen declines if policymakers maintain a dovish tone and avoid signaling rate hikes.
Euro and Pound Remain Under Pressure
The euro remains constrained by France’s political turmoil after the surprise resignation of Prime Minister Sebastien Lecornu. President Emmanuel Macron is expected to appoint a new government within days. The euro edged up 0.13% to $1.1644, ending three straight sessions of losses, but it remains nearly 1% lower for the week.
The British pound rose 0.09% to $1.3416, recovering from a recent two-week low, while the Australian dollar gained 0.33% to $0.6608. Meanwhile, the New Zealand dollar stayed near a six-month low at $0.5803 after the Reserve Bank of New Zealand cut interest rates by 50 basis points and warned of ongoing economic weakness.
Fed Minutes Highlight Rate-Cut Debate
The Federal Reserve’s September meeting minutes revealed that policymakers are increasingly concerned about risks to the U.S. labor market, supporting the case for a potential rate cut later this year. However, the Fed remains cautious amid lingering inflation pressures and uncertainty about the broader economy.
Analysts noted that markets continue to price in roughly two rate cuts by year-end, consistent with the Fed’s cautious stance. Still, a prolonged U.S. government shutdown could delay critical data releases, leaving the central bank with limited visibility heading into its October policy meeting.
Despite the pause, the dollar index remains near 98.73, holding most of its weekly gains and outperforming major global peers.
