The Japanese yen (JPY) is facing significant selling pressure, experiencing a notable decline against the US dollar (USD) on Wednesday, with USD/JPY reaching 153.00 yen—its highest level since mid-February. As of now, the dollar/yen pair is trading around 152.84, reflecting an increase of over 3.5% this week, fueled by the yen’s continuing depreciation.
This weaker yen is indicative of ongoing capital outflows, as political instability in both France and Japan prompts investors to move away from the euro (EUR) and yen, driving up demand for the U.S. dollar. Traders seem to have tempered expectations for immediate tightening measures from the Bank of Japan after the leadership shift to Sanae Takaichi in Tokyo. Meanwhile, the political upheaval in France, following the resignation of Prime Minister Sébastien Lecornu, is putting additional pressure on the euro.
The changing market sentiment has boosted inflows into the dollar, which remains well-supported despite the Federal Reserve’s dovish stance on monetary policy and the prolonged U.S. government shutdown.
Recent minutes from the September 16-17 Federal Open Market Committee (FOMC) meeting showed that policymakers decided to lower the federal funds rate by 25 basis points (bp) to a range of 4.00-4.25%, citing rising downside risks to the labor market due to weaker-than-expected employment figures from July and August.
Nearly all members indicated that additional policy easing might be necessary in the latter half of 2025 if the labor market continues to weaken. However, both leaders stressed the importance of keeping long-term inflation expectations stable. While inflation is expected to stay above 2% in the near term before gradually reaching the target, the Fed staff has revised its GDP growth forecast for 2025 to 2028 upward, pointing to unexpectedly strong consumer spending and business investment.
Policymakers made it clear that their approach is flexible, with future decisions hinging on incoming data and the overall risk landscape. Some members suggested that current financial conditions indicate that policy might not be particularly tight, advocating for a cautious pace of further easing. Nonetheless, one dissenting voice, newly appointed Fed director Milan, pushed for a more aggressive 50 basis points cut, citing continued labor market weakness and a lower neutral rate.
