The Japanese yen declined sharply against the U.S. dollar on Tuesday, slipping to its lowest level since July 2024 amid worries about anticipated loosening of Japan's fiscal and monetary frameworks. The dollar advanced broadly, rebounding after a brief drop due to inflation data that indicated consumer prices in the U.S. increased roughly in line with economists' forecasts.
Speculation has risen that Japanese Prime Minister Sanae Takaichi may call a general election ahead of schedule, possibly as early as February, following remarks by the leader of her party's coalition partner. This move would allow Takaichi to leverage her sustained favorable approval ratings since assuming office in October.
According to Eric Theoret, a currency strategist at Scotiabank in Toronto, the prospect of a Takaichi-led government raises concerns for the yen. "Her stance is dovish on fiscal and monetary policy fronts," Theoret explained, noting that she may favor more relaxed fiscal spending and accept higher budget deficits.
Tuesday's trading saw the yen depreciate by approximately 0.6% against the dollar, reaching 159.11 yen per dollar. This accelerated drop has heightened market scrutiny for potential intervention measures by Japanese authorities to arrest the currency's slide.
Japan's Finance Minister Satsuki Katayama indicated shared concerns with U.S. Treasury Secretary Scott Bessent regarding what she described as the "one-sided depreciation" of the yen. Tokyo has intensified signals of possible intervention aimed at stabilizing the currency.
On the U.S. front, the greenback retreated briefly following inflation figures that sparked speculation the Federal Reserve could gain flexibility in adjusting rates. The December Consumer Price Index increased by 0.3% month-on-month, marking a 2.7% rise year-over-year, while core CPI edged up 0.2% in December, yielding a 2.6% annual increase.
Morningstar's chief U.S. economist Preston Caldwell commented that the data supports the trend of diminishing inflation pressures. Many market participants had expected more substantial price increases, which helped risk-sensitive currencies such as the Australian dollar rally after the report.
"There is growing sentiment that inflation may have reached short-term lows," Theoret observed. He suggested that the market positioning anticipated an inflation upside surprise, which did not materialize.
Federal Reserve officials have expressed cautious optimism about productivity gains aiding the return to the central bank's 2% inflation target but have reiterated the need to maintain current interest rates until there is clearer evidence of easing price pressures.
The dollar index, measuring the greenback's strength against a basket including the euro and yen, increased 0.28% to 99.15. Concurrently, the euro declined 0.17% to 1.1647 dollars, while sterling fell 0.23% to 1.3428 dollars. The Australian dollar dropped 0.45% to 0.668 dollars after briefly rising to 0.6725 post-data.
Last Friday's solid employment growth data in the U.S. bolstered expectations that the Federal Reserve will likely maintain rates at its January 27-28 meeting. Futures pricing suggests that a rate cut is improbable before June.
Political developments in the U.S. are also impacting markets: The Department of Justice has threatened to indict Fed Chair Jerome Powell over a building renovation issue, prompting coordinated support from global central banks. President Donald Trump plans to announce a nominee to succeed Powell when his term ends in May, linking December's inflation data to his advocacy for rate reductions.
Geopolitical tension remains elevated with the U.S. detaining Venezuelan leader Nicolas Maduro, ongoing protests in Iran, and U.S. interests in acquiring Greenland. Additionally, attention is on an impending Supreme Court ruling regarding the legality of Trump's tariff policies, expected soon.
In cryptocurrencies, bitcoin surged 3.12%, reaching $93,811.