The U.S. dollar surged to a one-month high against the yen on Thursday, driven by strong U.S. jobs data and a decisive shift in Japan’s economic stance. The robust performance of the U.S. labor market has bolstered the notion that the Federal Reserve may not need to cut interest rates aggressively, while the yen weakened sharply following remarks from Japan’s new Prime Minister, Shigeru Ishiba, suggesting the country is not prepared for further rate hikes.
U.S. Dollar Gains Momentum
The dollar’s strength has been buoyed by private payroll data that exceeded expectations. The ADP National Employment Report showed an increase of 143,000 jobs in the U.S. last month, raising hopes for a solid non-farm payrolls report on Friday. This has reduced the likelihood of the Fed implementing steep rate cuts. The market is now pricing a 34.6% chance of another 50 basis-point cut in the Fed’s upcoming November meeting, down from 57.4% odds a week ago.
This optimism about the U.S. economy was further fueled by comments from Federal Reserve Chair Jerome Powell, who reiterated that the U.S. economy remains strong. As a result, the dollar has strengthened across the board, including against the yen, euro, and pound. The dollar index rose to 101.70, a three-week high, extending gains from earlier in the week.
Yen Plunges Following Policy Shift in Japan
While the dollar surged, the yen took a significant hit after Prime Minister Shigeru Ishiba made a bold declaration that Japan is not ready for additional rate hikes. His comments, combined with dovish remarks from Bank of Japan (BOJ) Governor Kazuo Ueda, caused the yen to drop more than 2.9%, its sharpest decline since June 2022. The currency briefly fell beyond the 147 level for the first time since early September.
This marked the second major decline for the yen in a matter of days, following a previous 1% drop earlier in the week after Powell’s comments. The sharp sell-off in the yen underscores the intense market volatility as traders reassess Japan’s monetary policy outlook. Some analysts, like Mari Iwashita from Daiwa Securities, suggest that Ishiba’s straightforward statement may have been part of a broader strategy to soften the market shock, now dubbed the "Ishiba shock."
Euro and Other Currencies Struggle Amid Dollar Strength
Other major currencies also faced pressure amid the dollar’s rally. The euro remained near a three-week low, following a dovish tone from European Central Bank (ECB) policymaker Isabel Schnabel on inflation. With the ECB signaling a potential rate cut in the near future, the euro struggled to regain ground, trading at $1.10455. Similarly, sterling held steady at $1.3261, while risk-sensitive currencies like the Australian dollar stayed flat at $0.6884.
Geopolitical Risks Add to Safe-Haven Dollar Demand
Beyond economic fundamentals, geopolitical tensions also played a role in the dollar’s rise. Safe-haven demand for the U.S. currency increased after Iran launched 180 ballistic missiles into Israel, prompting fears of further escalation in the region. Though there has been no immediate retaliation from Israel, traders are wary of the potential for an all-out war, which could further impact currency markets.
Outlook for the Yen: Continued Weakness Ahead?
With the BOJ signaling a pause on further rate hikes, analysts are now predicting continued depreciation of the yen through the end of the year. Yuya Yokota, a foreign exchange trader at Mitsubishi UFJ Trust and Banking Corp, suggested that the BOJ will likely avoid any further shocks to the market after the recent volatility.
According to Jane Foley, head of FX strategy at Rabobank, the yen’s recent volatility reflects deep-seated uncertainties about BOJ policy and potential interference by Japan’s new prime minister. As the market digests these signals, traders may become more cautious, leading to further yen weakness.
Some hedge funds remain short on the yen but have begun trimming their bearish bets in recent weeks. Option traders, meanwhile, continue to express optimism for the yen in the medium term, though bullish sentiment has diminished since early September.
Dollar Bulls vs. Yen Bears
The dollar’s recent rally, supported by strong U.S. job data and a hawkish Federal Reserve, has widened the gap between the U.S. and Japanese economies. As the U.S. remains poised to maintain higher interest rates, Japan’s dovish stance under Prime Minister Ishiba and BOJ Governor Ueda has weighed heavily on the yen, triggering its steepest decline in over two years.
Looking ahead, traders will be closely watching Friday’s U.S. non-farm payrolls report for further clues on the Federal Reserve’s monetary policy. Meanwhile, Japan’s policy trajectory and its impact on the yen will remain a key focal point for global currency markets as the year progresses.
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