The US dollar weakened against major currencies on Tuesday, giving up part of its previous session’s gains as strong demand for Japanese government bonds triggered a rally in the yen.
Meanwhile, the euro recovered modestly as unrest in France showed signs of easing, although concerns about the country’s finances continued to weigh on investor confidence.
The US Dollar Index (DXY), which measures the greenback against six major currencies, declined 0.19% to 101.79. The index had previously climbed to 101.98 on Monday.
Lower US Treasury yields also contributed to the dollar’s weakness, reinforcing the broader downward pressure on the American currency.
Japanese Yen Surges Following Record Government Bond Auction
The Japanese yen emerged as one of the strongest-performing major currencies on Tuesday, ending a two-day losing streak as investors responded to exceptionally strong demand for Japanese government debt.
Japan’s latest auction of 20-year Japanese Government Bonds (JGBs) attracted record interest from institutional investors.
According to the reported auction results, the bid-to-cover ratio reached 5.84, meaning investors submitted bids worth nearly six times the amount of bonds offered.
This represented the strongest demand recorded since Japan introduced its 20-year government bond maturity in 1987.
The impressive auction results highlighted growing investor appetite for Japanese sovereign debt, particularly as higher yields made long-term bonds more attractive.
Consequently, the yield on Japan’s 20-year government bonds fell sharply, dropping by as much as six basis points to approximately 3.71%.
The strong demand also encouraged traders to reduce positions favoring the US dollar against the yen.
As a result, USD/JPY declined approximately 0.3% to trade near 158.10, marking a notable recovery for the Japanese currency.
Investors are now focusing on the Bank of Japan’s upcoming monetary policy review for additional indications about the direction of Japanese interest rates.
Euro Recovers as French Political Unrest Temporarily Eases
The euro also strengthened against the US dollar, recovering from the weakness experienced during the previous week.
EUR/USD advanced approximately 0.2% to $1.1231 after recently falling to its lowest levels since May 2025.
The single currency benefited from signs of improving stability in France, where authorities introduced restrictions and security measures following several days of violent anti-government demonstrations.
Curfews across parts of major French cities helped reduce unrest temporarily, providing some relief to financial markets.
However, investors remain cautious about France’s political situation and deteriorating fiscal outlook.
Concerns about the country’s public finances have increased borrowing costs and placed additional pressure on French government bonds.
French Bond Yields Highlight Growing Fiscal Concerns
The spread between French 10-year government bond yields and their German counterparts remains an important indicator of investor confidence in France’s economy.
On Monday, the difference between French OAT yields and benchmark German Bund yields widened by nearly 10 basis points to approximately 147.3 basis points.
This widening spread suggests investors are demanding a higher premium to hold French sovereign debt amid growing political and fiscal uncertainty.
Market attention has also shifted toward France’s proposed 2027 government budget.
President Emmanuel Macron’s administration faces the difficult task of addressing a budget deficit estimated at 5.4% of gross domestic product in 2026 while navigating strong opposition in parliament.
Disagreements over proposed revenue measures and numerous amendments have complicated the legislative process.
ING currency strategist Chris Turner warned that France’s political developments could continue to create downward pressure on the euro.
Turner suggested that even parliamentary approval of the budget’s revenue provisions might fail to reassure financial markets because of the extensive amendments proposed by opposition parties.
Therefore, although EUR/USD has stabilized in the short term, persistent concerns about French government finances could limit the currency’s recovery.
British Pound Strengthens on Positive UK Employment Data
Elsewhere in the foreign exchange market, the British pound recorded solid gains against the US dollar.
GBP/USD advanced approximately 0.4% to trade near $1.3350, supported by encouraging economic figures from the United Kingdom.
Official employment data showed stronger-than-expected wage growth and improvements in job creation, suggesting greater resilience in the British labor market.
The figures strengthened expectations that the Bank of England could maintain a relatively restrictive monetary policy stance to contain inflation.
Higher interest rate expectations can make sterling-denominated assets more attractive to investors, potentially supporting the British currency.
As a result, the pound outperformed the US dollar during Tuesday’s trading session.
US Dollar Outlook: Bond Yields and Central Bank Decisions in Focus
The latest movements in foreign exchange markets highlight the growing influence of government bond yields, economic data and political uncertainty on major currency pairs.
For USD/JPY, strong demand for Japanese government bonds and upcoming Bank of Japan policy decisions remain important factors.
Meanwhile, EUR/USD traders are closely monitoring developments surrounding France’s budget negotiations and sovereign bond market.
In the United Kingdom, stronger employment figures have increased attention on the Bank of England’s next interest rate decision.
Looking ahead, the US dollar’s direction will likely depend on changes in Treasury yields, expectations surrounding Federal Reserve policy and developments across other major economies.
For now, the yen’s recovery, the euro’s stabilization and the pound’s advance have placed renewed pressure on the greenback.
