The divergence in the policies of the US, Japan, and European Central Banks has led to dramatic changes in the Exchange Rate, putting pressure on the dollar while strengthening the yen.

Source: BlockMedia Original Title: [Forex] Dollar falls on concerns over US-Japan interest rate differential… Yen turns strong Original Link:

Market Overview

In the New York foreign exchange market, the US dollar is showing weakness against major currencies, and market sentiment is becoming more cautious. Expectations for a loose monetary policy from the Federal Reserve are increasing, combined with the interest rate hike by the Bank of Japan and the European Central Bank's decision to maintain rates, which has raised expectations for exchange rate differentials and created downward pressure on the US dollar.

The US Dollar Index ( DXY ) decreased by 0.4% today, reaching 97.91, significantly weaker than the previous day's closing price of ( 98.33 ). This level is close to the October low, indicating that the dollar may record its largest annual decline this year.

Federal Reserve's Easing Expectations Dominate

The main driver of the US dollar's weakness comes from changes in expectations regarding Federal Reserve policy. The market anticipates that the Federal Reserve will cut interest rates by at least 50 basis points next year, which corresponds with the Fed's decision to resume its monthly purchase of $40 billion in short-term Treasury bonds, interpreted by the market as a strong signal of willingness to supply liquidity in the financial markets.

Political uncertainty has also increased the downward pressure on the dollar. President Trump recently stated that he would nominate a new Federal Reserve chairman early next year, and the market generally favors Kevin Hassett, the chairman of the White House Council of Economic Advisers, as a leading candidate. Hassett is regarded as a typical representative of the dovish camp, and if he takes office, it may further strengthen expectations for loose monetary policy.

There has also been discussion within the Federal Reserve about the possibility of gradual easing. Federal Reserve Governor Stephen M. Meyer warned that “if policies are not loosened more than they are now, the risk of recession may increase.” Meanwhile, Cleveland Federal Reserve Bank President Loretta Mester stated that “policy adjustments should be paused for now to observe economic impacts,” showing a divergence of opinions internally.

Yen Strength and Intervention Expectations

The Japanese yen has performed strongly against the US dollar, appreciating by about 0.5%, with the USD/JPY exchange rate falling to 156.88. Japanese government officials have recently assessed the yen's depreciation as “one-sided and sharp,” suggesting a possible market intervention. The Ministry of Finance's foreign exchange chief, Toru Amimura, stated that “appropriate measures will be taken if necessary,” and Chief Cabinet Secretary Hirokazu Matsuno also mentioned that “exchange rates should reflect fundamentals and remain stable.”

Experts generally believe that the possibility of the Japanese authorities intervening in the foreign exchange market may become a reality right after the Bank of Japan just raised interest rates. Mark Chandler, chief strategist at Bannockburn Global Forex, analyzed that “because of the rate hike, the Japanese government has reason to believe that the exchange rate has deviated from the fundamentals,” and pointed out that “short position liquidations are also occurring.”

Euro rebound

The euro rose 0.48% against the US dollar to 1.1761 dollars, ending a four-day decline. This is the result of the European Central Bank's decision to maintain interest rates being positively interpreted by the market. European Central Bank Executive Board member Gediminas Šimkus stated, “The price increase remains stable at the 2% level, and the current interest rate is assessed as neutral.”

Peter Kazimir, a member of the European Central Bank's governing council, also pointed out that “the current inflation and moderate growth, while stable, still face geopolitical risks and tariff uncertainties,” implying a sustained tightening tone. The swap market reflects a 0% probability of an interest rate cut at the European Central Bank meeting in February next year.

Outlook

The US dollar may continue to weaken due to multiple factors such as the Federal Reserve's dovish tone, political uncertainty, and concerns over the inversion of global interest rate differentials. Especially against the backdrop of precious metals like gold and silver reaching historical highs and the increased preference for safe-haven assets, the relative attractiveness of the dollar is declining.

The Japanese yen is expected to receive strong support in the short term due to interest rate hikes and anticipated verbal interventions. The market is focused on whether the Bank of Japan will further raise interest rates next year, which will be a driving factor for the strength of the yen.

The euro is expected to maintain a stable trend in the short term under the good judgment of the European Central Bank's monetary policy stance. Although the British pound has seen a significant increase this year despite interest rate cuts, the risk of short-term adjustments cannot be ruled out.