The Japanese Yen has weakened against the US Dollar, with the USD/JPY rising due to higher US Treasury yields and a stronger Dollar. The pair is currently trading at about 156.70, up almost 0.23% for the day, despite lower US Purchasing Managers Index data earlier. The US Dollar Index stands at approximately 98.53 after dropping to a low of 98.16. In December, the US Services PMI fell to 52.5 from November’s 54.1, and the Composite PMI decreased to 52.7 from 54.2. This indicates a slowdown in both services and manufacturing growth.

Dollar Recovery and Market Anticipation

Although the Dollar has begun to recover, its long-term outlook remains uncertain. Markets expect two Federal Reserve rate cuts this year. The Fed is likely to keep interest rates steady at its late January meeting, with an 85% chance of no change, according to CME FedWatch. There is growing interest in US-Venezuela relations due to recent military actions. Any further military developments may enhance the safe-haven appeal of the US Dollar. The Bank of Japan is expected to raise rates as economic conditions and inflation improve, which could help strengthen the Yen. Looking back at last year’s analysis, we noted a well-established tension between a strong Dollar and a weak Yen around the 156.70 level. This is mainly driven by the significant gap between US and Japanese interest rates. This fundamental difference continues to be the key factor for the currency pair as we enter the first quarter of 2026.

The Case for Continued Dollar Strength

The argument for continued Dollar strength has been bolstered by recent data not available last year. The latest Nonfarm Payrolls report for December 2025 showed the US economy added 210,000 jobs, far exceeding expectations. This strong labor market makes it harder for the Federal Reserve to justify the aggressive rate cuts that many anticipated in 2025. Consequently, US Treasury yields are holding steady, with the 10-year note around 4.2%, offering attractive returns compared to other major economies. Additionally, recent core inflation data from late 2025 showed a rate of 3.5%, significantly above the Fed’s 2% target. This ongoing inflation suggests that the Fed will remain cautious, keeping rates higher for longer. On the flip side, the Bank of Japan did implement a minor rate hike in 2025, but the difference in policy rates remains large. This makes holding Yen less appealing and promotes carry trades, where traders borrow Yen to invest in higher-yielding Dollars. While we should be on alert for any intervention from Japanese officials if the Yen weakens too quickly, such actions have typically provided only temporary relief. Given this context, we should consider strategies to benefit from further USD/JPY strength in the upcoming weeks. One option is to buy call options to capture potential gains beyond current levels, possibly targeting a move toward 158.00. Another strategy is selling out-of-the-money put options to earn premium while maintaining a bullish-to-neutral outlook. The geopolitical risks we discussed last year, especially regarding Venezuela, have lessened but remain a useful reminder. Any unexpected global instability would likely lead to safe-haven flows into the US Dollar, further supporting our long USD/JPY position. We will continue to balance the strong US labor and inflation data against any signs of economic slowdown, such as the weaker PMI figures from 2025. Create your live VT Markets account and start trading now.

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