The USD/JPY remains strong, trading close to a two-week high of 157.00, just before the Federal Reserve’s (Fed) policy announcement. The Fed is expected to lower interest rates by 25 basis points, bringing them to between 3.50% and 3.75%. Revised data shows that Japan’s economy shrank by 0.6% in the third quarter. Despite general uncertainty around the US Dollar, the USD/JPY pair keeps its gains. The US Dollar Index, which measures the Dollar against other major currencies, has gone down slightly to around 99.10, nearing the recent low of 98.75 from last week. This week, the Japanese Yen has weakened, particularly against the New Zealand Dollar. Economic challenges in Tokyo are affecting the Bank of Japan’s interest rate expectations. Figures from Monday reveal a larger contraction in Japan’s economy at 0.6%, compared to the earlier estimate of 0.4%. The Federal Reserve plays a key role in maintaining price stability and full employment through interest rate changes. Lower rates encourage borrowing but may make the Dollar less appealing. The Fed meets eight times a year to review and decide on policy updates. They use methods like Quantitative Easing and Tightening to influence the economy and the Dollar’s value. As the Federal Reserve is expected to cut interest rates today, December 10th, 2025, we are paying close attention to how this will affect the market. The anticipated cut of 25 basis points reflects a cooling US economy this year. This situation makes the US Dollar less attractive, yet it remains strong against the Japanese Yen. The reasoning for this rate cut is evident in recent data. The November 2025 jobs report showed that the US economy added only 115,000 jobs, continuing a downward trend over the last two quarters. The unemployment rate is steady at 4.1%, giving the Fed ample reason to begin easing measures. On the flip side, the Japanese Yen remains weak. The confirmation that Japan’s economy contracted by 0.6% in the third quarter reduces the pressure on the Bank of Japan to raise interest rates. This keeps Japanese monetary policy very loose compared to other countries. This situation resembles the trends of 2022 and 2023 when a wide interest rate gap supported a strong carry trade. Even with today’s expected Fed cut, the US interest rate at 3.50% will still be significantly higher than Japan’s, which is near zero. This difference should continue to weigh down the value of the Yen. In the weeks ahead, traders are expected to use options to manage the risk of a bigger-than-expected decline in the dollar. Buying put options on the USD/JPY pair can act as a safeguard if the Fed indicates more aggressive future cuts than expected. This strategy allows traders to protect their positions while remaining open to potential gains if the Yen remains weak. The focus will be on the Fed’s forward guidance and dot plot expected later today. If policymakers signal a steady approach to rate cuts into 2026, the USD/JPY pair could stay close to the 157.00 mark. Any declines are likely to be seen as buying opportunities until Japan’s economic data shows a significant improvement.

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