The USD/JPY pair is currently facing considerable downward momentum, trading approximately 0.75% lower at around 155.80 during the European session on Tuesday. This selling pressure on the pair can be attributed to the underperformance of the US Dollar (USD), largely fueled by shifting expectations regarding interest rate adjustments by the Federal Reserve (Fed). Market speculation indicates a greater likelihood of the Fed enacting additional interest rate cuts in 2026 than previously suggested in their monetary policy announcement made on December 17.
Reflecting this trend, the US Dollar Index (DXY), which measures the value of the dollar against a basket of six major currencies, has recently revisited lows not seen in over 11 weeks, sitting near 97.85. Current data indicates a marked weakness of the USD against various currencies, with notable drops observed against the New Zealand Dollar.
The following table illustrates today’s percentage changes of the US Dollar against key global currencies:
– Euro: -0.35%
– Pound Sterling: -0.40%
– Japanese Yen: -0.36%
– Canadian Dollar: -0.58%
– Australian Dollar: -0.79%
– New Zealand Dollar: -0.60%
– Swiss Franc: -0.35%
Conversely, other major currencies have demonstrated stronger performance against the USD, indicating a general trend of dollar weakness.
The CME FedWatch tool reveals a 73.8% probability that the Federal Reserve will reduce interest rates by at least 50 basis points in the coming year. This forecast diverges from the Fed’s recent dot plot projections, which anticipated the Federal Fund Rate to decrease only to 3.4% from current levels ranging between 3.50% and 3.75%, implying only a single interest rate cut in 2026. The expectations for dovish monetary policy have been heightened amidst disappointing job market data and previous Consumer Price Index (CPI) reports, which suggested minimal inflationary impact from tariffs.
Investors are now turning their attention toward the impending release of the flash Q3 Gross Domestic Product (GDP) data, scheduled for publication at 13:30 GMT. This data is anticipated to provide new insights into the current state of the US economy and may further influence the dollar’s trajectory.
In contrast, the Japanese Yen (JPY) has experienced an uptick, driven by the recent warnings from Japan’s Finance Minister Satsuki Katayama. She emphasized the government’s preparedness to intervene if the Yen experiences excessive fluctuations. Katayama stated, “Japan has a free hand in dealing with excessive moves in the Yen,” reinforcing the notion that appropriate actions will be taken to support the currency.
The landscape of monetary policy in the US is heavily influenced by the Federal Reserve, which operates with the dual mandate of achieving price stability and fostering full employment. To meet these objectives, the Fed adjusts interest rates to manage inflation and employment levels. An increase in interest rates typically strengthens the USD, while a decrease tends to weigh on it.
The Federal Reserve convenes for eight policy meetings annually to evaluate economic conditions and make monetary policy decisions, with meetings attended by twelve officials, including members of the Board of Governors and regional Reserve Bank presidents.
In extraordinary circumstances, the Fed may employ quantitative easing (QE), which involves increasing credit flow in a stagnant financial environment, often leading to depreciation of the dollar. Conversely, the process of quantitative tightening (QT) entails halting bond purchases and not reinvesting maturing bonds, generally favoring the dollar’s value.
As market participants navigate these developments, a keen eye will be on upcoming economic indicators that could further inform the direction of US monetary policy and, by extension, the dollar’s performance against the yen and other major currencies.
