Dollar Eases as Traders Weigh Fed Outlook and Yen Intervention Risk

Key Moments

Dollar Pulls Back After Recent Strength

The U.S. dollar edged lower on Monday, giving back part of last week’s advance. Previously, the greenback found support as softer inflation data failed to convince markets that the Federal Reserve would cut rates again in the near term.

However, investor focus has now shifted firmly to December inflation figures. Analysts say this data will play a larger role in shaping expectations for future policy moves.

Geopolitics and China Policy Shape Risk Sentiment

Risk appetite remained subdued due to rising geopolitical tensions. In particular, strained relations between the U.S. and Venezuela added to caution across markets.

In addition, investors stayed alert to the risk of renewed conflict between Israel and Iran. Meanwhile, Asian markets reacted little after the People’s Bank of China left a key lending rate unchanged, as expected.

Yen Edges Higher on Intervention Warnings

Against this backdrop, the Japanese yen recovered modestly. USD/JPY slipped 0.2% to around 157.45, although the pair remained near levels seen earlier this year.

The move followed comments from Japan’s top currency diplomat, Atsushi Mimura. He warned that authorities stood ready to take “appropriate” action to counter excessive currency volatility.

Even so, the yen has faced steady pressure in recent weeks. Concerns over Japan’s fiscal outlook and rising diplomatic tensions with China have weighed on sentiment.

BOJ Policy Moves Fail to Reverse Yen Weakness

Last week’s Bank of Japan rate hike and hawkish signals failed to change the yen’s broader trend. Instead, markets expressed frustration over the lack of clear forward guidance.

“Near-term risks may still skew toward further JPY weakness,” OCBC analysts wrote. They cited the BOJ’s slow policy normalization and ongoing fiscal concerns as key headwinds.

Major Currency Movers

Elsewhere, the euro and British pound advanced against the dollar. EUR/USD gained 0.2%, while the pound outperformed its peers, with GBP/USD rising 0.35%.