In currency markets on Tuesday, the Japanese yen slid to its weakest valuation against the U.S. dollar since July 2024 amidst investor apprehension surrounding Japan’s fiscal and monetary trajectory. The U.S. dollar strengthened broadly after a brief retreat that followed consumer price index (CPI) data revealing inflation rates slightly lower than anticipated.
Political developments in Japan have fueled these market shifts, with reports indicating that Prime Minister Sanae Takaichi is considering calling a general election earlier than scheduled, potentially as soon as February. This move, endorsed by a partner in her coalition, could allow her to leverage favorable approval ratings that have accompanied her tenure since October.
Market analysts interpret Takaichi's leadership stance as notably dovish regarding both fiscal and monetary policies. Eric Theoret, a currency strategist at Scotiabank in Toronto, remarked, "The implications for the yen are quite negative because Takaichi is a dove on both the fiscal and monetary fronts, so fiscally she would be very comfortable with a looser, higher deficit policy."
During Tuesday’s trading, the yen depreciated by approximately 0.6 percent to 159.11 per U.S. dollar, intensifying concerns over its continued downtrend. This swift slide toward a weaker yen has raised speculation about possible governmental intervention to stabilize the currency. Japan’s Finance Minister Satsuki Katayama emphasized shared concerns with U.S. Treasury Secretary Scott Bessent regarding the "one-sided depreciation" of the yen in recent times, signaling Tokyo’s readiness to act if necessary.
Meanwhile, the dollar's initial fall following the release of U.S. inflation data was short-lived. The CPI data indicated a 0.3 percent monthly increase, translating to a 2.7 percent year-over-year growth. Core CPI, which excludes volatile food and energy prices, rose 0.2 percent month-over-month, with a 2.6 percent annual increase. These figures broadly aligned with economists’ expectations and contributed to speculation that inflationary pressures may be easing.
Preston Caldwell, Chief U.S. Economist at Morningstar, noted, "Today’s data adds further support to the notion that inflation is trending down." Despite this, some market participants, including Theoret, pointed out that traders had positioned themselves anticipating potentially higher inflation, causing an upbeat response from risk-sensitive currencies such as the Australian dollar in the aftermath of the report.
Federal Reserve officials remain cautious about the extent to which increased productivity can sustainably bring inflation back to their 2 percent target, signaling intent to maintain current interest rate levels until inflation clearly moderates. This cautious stance was reflected in market pricing, with expectations for a rate cut not materializing before June, according to Fed funds futures.
The dollar index, measuring the greenback against a basket of currencies including the euro and yen, rose by 0.28 percent to 99.15. Conversely, the euro slipped 0.17 percent to $1.1647 and the British pound declined by 0.23 percent to $1.3428. The Australian dollar experienced a dip of 0.45 percent against the U.S. dollar to $0.668 after briefly climbing to $0.6725 following the CPI release.
Friday’s robust U.S. employment figures further contributed to the dollar’s strength, reinforcing the expectation of a Federal Reserve hold on rates at its upcoming January 27-28 meeting. However, recent political developments have put a spotlight on the Fed's independence, including a Department of Justice threat to indict Federal Reserve Chair Jerome Powell related to a courthouse renovation project. In response, central bankers globally issued a statement affirming support for Powell.
President Donald Trump is reportedly preparing to announce his nominee for the Federal Reserve chairmanship, as Powell’s term concludes in May. Trump referenced the December inflation data as evidence supporting his call for rate reductions.
Geopolitical uncertainties continue to affect market sentiment with the United States detaining Venezuelan leader Nicolas Maduro, ongoing protests in Iran, and Trump’s considerations regarding the U.S. acquisition of Greenland. Additionally, traders are awaiting a possible U.S. Supreme Court ruling on the legality of Trump-era tariff policies, potentially as soon as Wednesday.
In the cryptocurrency arena, bitcoin advanced 3.12 percent to $93,811.