The US Dollar is falling and is close to the 152.00 mark due to increasing trade uncertainties. The struggle around 152.00 is tied to trade tensions with China and political issues in Japan. Rising costs for cargo ships have worsened the trade friction between the US and China, weakening the US Dollar. The trade relationship is complicated further by upcoming talks between US President Trump and China’s Xi Jinping planned for late October.

Political Instability in Japan

In Japan, the collapse of the ruling coalition is affecting the new leader of the Liberal Democratic Party (LDP), Takaichi, and weakening her economic plans. This political turmoil is strengthening the Japanese Yen as markets remain cautious. The US-China trade war, which started in 2018 under President Trump, involved trade barriers and led to the Phase One trade deal in 2020. However, under President Joe Biden, tariffs were kept and even extended. Donald Trump’s return to the presidency in 2025 has rekindled tensions, especially with his promise to impose a 60% tariff. This ongoing trade war is disrupting global supply chains, leading to decreased spending and impacting inflation. The growing rift between the US and China is creating significant uncertainty, driving the US Dollar lower and keeping USD/JPY under the 152.35 resistance level. We are seeing a rise in implied volatility, with the Japanese Yen Volatility Index (JYVIX) surging over 15% in the past week, its highest level since the regional banking stress earlier this year. This indicates that options traders expect larger price fluctuations in the yen in the coming weeks.

Economic Impact on the US Dollar and Japanese Yen

In the US, the renewed protectionist approach is affecting economic data, putting pressure on the dollar. Last week, the US import price index unexpectedly increased by 0.5%. This spike is a direct result of new cargo fees and tariffs since President Trump took office again in January 2025. This complicates the Federal Reserve’s situation, as inflation from tariffs may rise alongside slowing economic growth. In Japan, the political confusion after the ruling coalition’s collapse is, oddly, helping the yen. The market sees the lack of support for Takaichi’s pro-stimulus plans as a signal that big fiscal spending and monetary easing might be coming to an end. CFTC positioning data shows large speculators have reduced their short yen positions for the fourth week in a row, reflecting a broader change in sentiment. This situation resembles mid-2019 when a similar escalation in the first trade war caused USD/JPY to drop from about 111 to below 106 within months. A strategy of purchasing USD/JPY put options with a strike price below 151.00 could be profitable, especially with the upcoming Trump-Xi meeting at the end of October acting as a potential catalyst. We also need to think about the risk of intervention from Japanese authorities if the yen appreciates too quickly. While they were okay with a weaker yen when inflation was the main concern, a fast move towards 148.00 could prompt warnings from the Ministry of Finance. This means selling out-of-the-money JPY call options could be risky until we have a clearer understanding of their limits. Create your live VT Markets account and start trading now.

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