Modest US Dollar weakness leaves Japanese Yen little changed

Between 157.00 and 158.00, USD/JPY remains rangebound with no clear directional bias.

Tokyo remains committed to supporting the Yen, Finance Minister Katayama reaffirmed on Monday.

Ahead of Tuesday's US midterm elections, the US Dollar continues to trade on the defensive.

Friday's decision to leave monetary policy unchanged, alongside uncertainty from the Bank of Japan (BoJ) over the timing of its next interest rate rise, has left USD/JPY trading within its established range around 157.00. The Japanese Yen (JPY) remains without direction on Monday, failing to capitalise on modest US Dollar (USD) weakness as markets prepare for the US midterm elections.

Tokyo stands ready to act should currency market moves become disorderly, Japanese Finance Minister Satsuki Katayama reaffirmed earlier on Monday. She also recalled the agreement with the US to curb excessive JPY weakness. Her remarks have nevertheless had little effect on the Yen.

The Bank of Japan held its benchmark interest rates at 1.25% on Friday, in line with widespread expectations. However, Governor Ueda made further rate rises conditional on developments in FX, IA and the Middle East conflict. His press release and the policy decision prompted modest JPY losses, as doubts over a December rate rise undermined speculative support for the currency.

Dollar loses momentum as softer Fed signals meet growing US political uncertainty

Softer policy signals from the Fed, together with growing political uncertainty, explain the US Dollar's recent loss of momentum, according to analysts at MUFG. In a note, MUFG says: “A damaging defeat for the Republicans could put a dampener on US dollar strength, but we don’t expect it to be a game changer on its own,” adding that it “would limit room for further fiscal stimulus and could increase market attention on the potential for less market-friendly policies beyond the current Presidency.”

Turning to market developments, MUFG attributes some of the Dollar's reduced appeal to the fact that “the Fed’s policy update was less hawkish than expected, and AI-related US equities came under renewed selling pressure,” while also noting that “the 2-year US Treasury yield has fallen by almost 40bps from the high at the end of September,”. A further potential influence on the Dollar and wider rate expectations is the Treasury's forthcoming announcement: MUFG says that “market participants will be watching closely this week’s Quarterly Refunding Announcement from the US Treasury,”.