Japanese Yen Eases After Rally as Dollar Holds Firm on Fed Rate Cut Expectations
The Japanese yen began the week under pressure after posting strong gains last week, while the U.S. dollar remained stable as traders assessed the outlook for Federal Reserve interest rate cuts.
Market liquidity is expected to remain thin, with financial markets in the United States, China, Taiwan and South Korea closed for a public holiday.
Yen Pulls Back After Sharp Weekly Surge
In early Monday trading, the yen slipped 0.2% to 153.07 per U.S. dollar. The modest decline follows a nearly 3% rally last week — the currency’s strongest weekly performance in around 15 months. The surge came after Prime Minister Sanae Takaichi secured a decisive election victory, easing fiscal uncertainty in Japan.
Brent Donnelly, founder of Spectra Markets, noted that many investors initially believed a supermajority for Takaichi’s Liberal Democratic Party would weigh on Japanese bonds and the yen. Instead, both assets rallied.
According to Donnelly, the removal of political uncertainty encouraged long-term investors to return to Japanese markets. Higher domestic bond yields, a firmer Nikkei index, and renewed interest in the yen have fueled what some traders call the “Buy Japan” trade.
Weak GDP May Complicate Bank of Japan Policy
However, fresh economic data revealed ongoing challenges for Japan’s economy. Gross domestic product expanded at an annualized rate of just 0.2% in the October–December quarter, highlighting sluggish growth.
The weak GDP figures may complicate the Bank of Japan’s tightening plans. The central bank is scheduled to meet in March, with markets currently assigning roughly a 20% probability of a rate hike.
Some analysts expect the yen’s recent strength to fade. OCBC maintained its forecast for the currency to reach 149 per U.S. dollar by the end of 2026. The bank believes the yen will struggle to shift from being primarily a funding currency to an investment currency unless the Bank of Japan adopts a more hawkish stance than currently expected, which includes two rate hikes this year.
Dollar Steady as Fed Rate Cut Bets Grow
Meanwhile, U.S. inflation data released on Friday showed consumer prices rose less than anticipated in January. While the figures supported expectations for rate cuts later this year, they did not signal urgency for immediate action before June.
Market participants are increasingly pricing in additional easing from the Federal Reserve. Futures markets indicate around 62 basis points of rate cuts for the remainder of the year, with a 68% probability that the next reduction could come in June.
The euro traded largely unchanged at $1.1863, while the British pound slipped slightly to $1.3638. The dollar index, which tracks the greenback against six major currencies, held steady at 96.959 after declining 0.8% last week.
Bond markets saw notable movement following the inflation release. The U.S. two-year Treasury yield — which closely reflects interest rate expectations — fell to its lowest level since 2022 on Friday. The 10-year yield also declined by nearly five basis points.
Swiss Franc Softens as Intervention Risks Rise
The Swiss franc edged lower to 0.7685 per U.S. dollar after gaining more than 1% last week. Investors are increasingly cautious about potential intervention from the Swiss National Bank to limit excessive currency strength.
Strategists at OCBC warned that further appreciation of the Swiss franc could lead to downside surprises relative to the central bank’s inflation forecasts. While the threshold for returning to negative interest rates remains high, sustained currency strength may test the SNB’s tolerance for additional gains.
Overall, currency markets remain focused on central bank policy expectations, with traders closely monitoring both Federal Reserve rate cuts and the Bank of Japan’s next moves.
