The Japanese yen lingered near a three-month low against the U.S. dollar on Tuesday as Japan’s ruling coalition fell short of a parliamentary majority in weekend elections, stirring concerns about the country’s political and economic trajectory. Meanwhile, the U.S. dollar, which has benefited from resilient economic data and growing market optimism, eased slightly but remained close to recent highs. Investors are now focused on key U.S. economic data later this week, which could influence the Federal Reserve’s next policy moves.
The yen rose slightly by 0.1%, reaching 153.12 per dollar, after dropping to a low of 153.885 on Monday – its weakest point since July. This slip came after Japan’s national election on Sunday saw the Liberal Democratic Party (LDP) and its junior coalition partner, Komeito, fail to secure a majority in the lower house. The coalition obtained 215 seats, falling short of the 233 required to control the house outright, prompting uncertainty over the country’s future government.
Japan’s political shakeup adds another layer of unpredictability for currency markets already dealing with global economic challenges. Carol Kong, a currency strategist at the Commonwealth Bank of Australia, emphasized the potential impact of Japan’s political changes on the yen. “All up, the risks appear skewed to looser fiscal policy than otherwise under the new government,” said Kong. “Together with solid U.S. economic data and stronger prospects of a Trump win, political uncertainty in Japan can pressure dollar/yen higher in the coming weeks.”
The political situation in Japan comes at a pivotal moment for the Bank of Japan (BOJ), which is scheduled to announce its latest monetary policy decision on Thursday. Given the heightened financial market volatility, experts like Kong suggest the BOJ may be inclined to hold its current interest rate policy steady for an extended period.
The yen’s depreciation wasn’t limited to the dollar; it also saw losses against the euro and British pound. As of Tuesday, the yen was trading at 165.73 per euro and 198.72 per sterling, marking three-month lows in these pairs as well. The broader decline across multiple currencies underscores the global investor hesitancy regarding Japan’s political stability and its potential effects on economic policy.
While the yen has struggled, the U.S. dollar has been in a comparatively stronger position. The dollar is on track for its most substantial monthly gains in over two-and-a-half years, with a 3.5% increase against a basket of major currencies in October. Resilient economic data has bolstered the dollar, as has rising market speculation regarding a potential electoral victory for Republican candidate Donald Trump in the upcoming U.S. presidential election. Trump’s policy stance, favoring tariffs, tax cuts, and stricter immigration, is viewed as inflationary, which tends to strengthen the dollar.
“Friday’s employment numbers and whether PCE prints at 0.2% or 0.3% are going to be pretty important,” remarked Ray Attrill, head of FX strategy at National Australia Bank. “Although the election is probably the biggest single factor for next week, we could still have a price adjustment… depending on what those numbers show at the end of the week.”
Investors are carefully watching for Thursday’s release of the core Personal Consumption Expenditures (PCE) price index – the Federal Reserve’s favored measure of inflation – as well as the nonfarm payrolls report due Friday. These indicators are anticipated to provide insights into the Fed’s policy direction, which could affect the dollar’s trajectory. The results could influence the Fed’s stance, determining whether it will maintain its higher interest rates in light of inflationary pressures or consider a more dovish approach if inflation moderates.
Despite some caution in Tuesday’s early Asian session, the dollar maintained a narrow trading range, reflecting investor caution ahead of the key data points. The dollar index remained relatively stable at 104.28.
The euro saw a modest increase of 0.05%, reaching $1.0816, while the British pound also ticked up by 0.03%, trading at $1.2976. Both currencies have remained relatively stable despite ongoing concerns over global economic uncertainties and market focus on U.S. data.
In other currency news, the New Zealand dollar fell 0.08% to $0.5976, and the Australian dollar dipped to its lowest level in over two months at $0.6572. The Australian currency, in particular, could see further challenges next week if emerging markets react negatively to a potential Trump win, according to Attrill.
China’s yuan traded at 7.1447 per dollar in the offshore market, with ongoing trade dynamics and economic recovery concerns continuing to weigh on its performance.
The uncertainty surrounding Japan’s government, coupled with the BOJ’s expected rate decision, has led to speculation about Japan’s economic policy direction, particularly in relation to fiscal policy. If the BOJ opts to maintain its current ultra-loose monetary policy, this could exert further downward pressure on the yen. Japan’s dependence on trade and export performance could also be affected if a weaker yen fails to attract investment amid global economic headwinds and a strong U.S. dollar.
The U.S. dollar’s strength this month highlights contrasting economic narratives between the United States and Japan. While Japan grapples with political uncertainty and economic stagnation, the U.S. has maintained strong employment figures, steady consumer demand, and robust inflation measures, bolstering the dollar.
The Fed’s upcoming decision will be pivotal in determining the dollar’s future trajectory. A stronger-than-expected inflation print could encourage further rate hikes or prolong the current high-rate environment, which would likely enhance the dollar’s strength in global markets. Conversely, softer inflation data might shift the Fed’s stance towards a more neutral or dovish approach, potentially weakening the dollar.
Investors remain vigilant, aware that the PCE and nonfarm payroll reports could bring about a recalibration of interest rate expectations. With the global economy in a delicate balancing act, the Federal Reserve’s policy path remains a major focal point for currency markets worldwide.
The potential for a Trump election win is seen as another factor that could drive up dollar demand. Policies under Trump are generally perceived as dollar-positive and potentially challenging for emerging market currencies, which are often sensitive to U.S. policy shifts. Given Trump’s previous trade tensions with China and other countries, a potential win could lead to market shifts, particularly in emerging markets like China, South Korea, and Brazil.
Attrill pointed out the Australian dollar’s vulnerability in such a scenario, explaining, “In terms of G10, the Aussie probably is the standout currency that could suffer if we did see a broader EM (emerging market) gut negative reaction next week if we do see news that Trump has won.”
With Japan’s government in flux and the U.S. approaching a significant election, political events are exerting more influence on currency markets. Traders are mindful that the unfolding political dynamics could reshape fiscal policies and monetary stances in both Japan and the U.S.
