The Japanese yen eased on Monday after posting its strongest weekly gain in about 15 months, while the U.S. dollar held steady as softer inflation data reinforced expectations of Federal Reserve rate cuts later this year. Thin liquidity conditions prevailed with markets in the United States, China, Taiwan and South Korea closed for holidays.
The yen weakened about 0.3% to around 153 per dollar after climbing nearly 3% last week, a rally driven in part by reduced fiscal uncertainty following a landslide election victory for Prime Minister Sanae Takaichi and her Liberal Democratic Party.
Stability Spurs “Buy Japan” Trade
Currency strategists said the decisive election outcome removed political uncertainty, encouraging long-term investors to return to Japanese assets. Higher domestic yields, improving market stability and renewed interest in Japanese equities have supported what some traders describe as a “Buy Japan” theme.
Kazuo Ueda is scheduled to meet Takaichi to discuss economic conditions and monetary policy, marking their first meeting since the election.
Weak Growth Clouds Policy Outlook
Economic data showed Japan’s economy expanded at an annualised pace of just 0.2% last quarter, highlighting the fragile recovery facing policymakers. The sluggish growth may complicate efforts by the Bank of Japan to tighten policy further.
The BOJ raised its benchmark rate to 0.75% in December — a 30-year high but still far below rates in other major economies. Markets currently assign low odds of another hike at the bank’s March meeting, with many economists expecting any tightening to be delayed until midyear.
Dollar Steady as Fed Cut Bets Grow
The U.S. dollar steadied after softer-than-expected inflation data suggested the Federal Reserve may have room to ease policy. Markets are increasingly pricing in multiple rate cuts this year, with the first reduction widely expected around June.
The dollar index hovered near recent lows after dropping last week, while Treasury yields declined, reflecting expectations of looser monetary policy.
Other Currency Moves
The euro traded little changed near $1.19 and sterling edged slightly lower. The Swiss franc softened modestly amid speculation the Swiss National Bank could act to curb further currency strength. Meanwhile, the Australian dollar remained close to a three-year high, while the New Zealand dollar edged lower ahead of the Reserve Bank of New Zealand policy meeting, where rates are expected to remain unchanged.
Outlook
Currency markets remain focused on diverging monetary policy paths. Investors are balancing the prospect of gradual tightening in Japan against easing expectations in the United States, a dynamic likely to shape yen and dollar movements in the months ahead.
With information from Reuters.
