Key points:
The yen hovered near a three-month low on Friday, heading for a fourth consecutive weekly decline.
Japan’s upcoming general election, which could challenge the ruling Liberal Democratic Party’s (LDP) dominance, has created uncertainty for traders.
Picture: USDJPY has declined from a peak of 153.186 to 151.856, with momentum weakening on the VT Markets app.
The possibility of a political shift raises concerns over the Bank of Japan’s (BOJ) ability to proceed smoothly with policy normalisation.
The central bank’s October 30-31 meeting will be closely watched, but the election results may complicate their plans for a lift-off from near-zero rates.
The yen lost 0.1% against the U.S. dollar, settling at ¥152 per dollar, marking a 1.5% drop for the week. This extends its overall decline to 5.5% for October, positioning it for its worst monthly performance since April 2022.
Traders remain vigilant, especially as the yen has weakened past the critical ¥150 level. There are growing concerns that Japanese authorities may step in with currency interventions if the yen’s slide continues.
Slightly better-than-expected Tokyo inflation data briefly supported the yen, but it wasn’t enough to reverse the downward trend.
Core inflation came in below the BOJ’s 2% target for the first time in five months, further fuelling speculation that rate hikes could be delayed into next year.
Market analysts have cautioned that a weaker LDP result in the election could create a knee-jerk reaction, leading to further yen depreciation.
In contrast, the U.S. dollar has retreated from its recent highs but remains strong, buoyed by softened expectations of aggressive Federal Reserve rate cuts.
The dollar index (DXY) dipped slightly, trading at 104.09, after earlier hitting a three-month peak of 104.57.
The index is set to gain 0.6% this week, marking its fourth consecutive weekly rise.
Treasury yields have eased, contributing to the dollar’s pullback, but market sentiment is being shaped by growing anticipation around the upcoming U.S. election and the potential for Donald Trump’s return to the presidency.
Commodity-linked currencies like the Australian and New Zealand dollars also faced headwinds this week.
Both currencies have lost about 1%, influenced by a stronger dollar and uncertainty surrounding the U.S. election, which has dampened risk sentiment.
See also: Aussie and Kiwi Weaken as Dollar Gains
While traders are alert to potential intervention from Japanese officials, the broader dollar strength suggests further challenges for the yen in the near term.
Cautious traders will likely remain focused on the BOJ’s October meeting and developments in U.S. politics as key factors influencing currency markets going forward.
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