The USD/JPY pair has dropped to about 157.80 during the European trading session. This fall is linked to a weaker US Dollar, caused by tensions between the US and the EU over Greenland’s sovereignty. The US Dollar Index, which compares the Dollar against six major currencies, is down 0.56% at around 98.45. The Dollar is suffering due to President Trump’s tariff threats towards several EU countries and the UK.

US Will Not Withdraw From NATO

Despite the pressure on the US Dollar, Treasury Secretary Scott Bessent assured at the World Economic Forum that the US will remain in NATO. He also indicated that the White House will soon announce the successor to Federal Reserve Chair Jerome Powell. At the same time, the Japanese Yen is strengthening against the US Dollar but is still weaker against other currencies. This is happening as Japan’s PM Sanae Takaichi plans to dissolve the lower house on January 23 and suspend the consumption tax for two years, suggesting more flexible fiscal policies ahead. The next key event for the Yen is the Bank of Japan’s monetary policy announcement on Friday. Ongoing geopolitical tensions are causing significant market fluctuations, and we should brace for more. The potential for US tariffs against the EU echoes the US-China trade disputes from 2018 to 2020, a time when currency volatility spiked over 15%, according to the Deutsche Bank Currency Volatility Index. Traders might think about buying options, like straddles, on USD/JPY to benefit from large price changes as the situation evolves.

The USD/JPY Trade Strategy

The Dollar seems likely to weaken further, with the DXY already at 98.45. The mix of trade disputes and uncertainty about the new Federal Reserve Chair are strong negative factors, as a new chair may lean towards more lenient policies. Historically, times of high trade uncertainty, like in mid-2019, have led to 2-3% drops in the Dollar Index within a quarter. Although the Yen is gaining against the Dollar, we must be cautious about its own weaknesses. Prime Minister Takaichi’s promise of a consumption tax cut reminds us of the fiscal measures from the “Abenomics” era last decade, which primarily drove sustained Yen weakness. During that time, USD/JPY rose from below 100 to over 120 between 2013 and 2015. This indicates that the Yen might not be the best currency to buy against the Dollar, and it could weaken against others. The upcoming Bank of Japan meeting on Friday is crucial for future direction. Given plans for looser fiscal policies, the BoJ is unlikely to signal any policy tightening, which will likely limit the Yen’s strength. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now