The USD is losing its strength due to confusion surrounding U.S. policy. Recent threats have shaken confidence, leading to increased FX hedging of U.S. assets. The USD/JPY exchange rate has gone down, and there are talks about possible U.S.-Japan interventions. The dollar has experienced selling pressure, resulting in a lower dollar index that ended a three-week winning streak. Joint U.S.-Japan intervention may suggest that the Trump administration prefers a weaker dollar.

Yen’s Rebound

The drop in the dollar is reinforced by the yen’s rise, which has seen USD/JPY decrease from 159.23 to 153.40. If the yen continues to strengthen, it might cause worries about the unwinding of JPY-funded trades, similar to what happened in mid-2024. Trump’s decision to cut higher tariffs on NATO members has lowered global growth risks. This action reduces the chances of a trade conflict between the U.S. and the EU, providing some economic relief. The U.S. dollar has lost its upward momentum from earlier this year, ending last week with its first weekly loss of 2026. The Dollar Index (DXY) has dropped to around 101.50 due to uncertainty over U.S. policy affecting investor confidence. This change means that hedging U.S. asset exposure is becoming a priority. The dollar’s decrease was driven by a significant rebound in the Japanese yen, which saw the USD/JPY pair fall from over 159 to below 154. This situation reminds us of the interventions from late 2024, raising the possibility of a joint U.S.-Japan effort to weaken the dollar. For derivative traders, this indicates that buying put options on USD/JPY or investing in options to bet on increased currency volatility are good strategies.

Market Risk and Defensive Strategies

We need to keep an eye on the potential unwinding of JPY-funded carry trades, which caused major market stress in the summer of 2024. A rapidly strengthening yen could force investors to sell global assets to repay the yen they borrowed, increasing overall market risk. The VIX, a key measure of stock market fear, has already risen from its lows earlier this month, reflecting rising concerns. Given this risk, purchasing protective put options on major U.S. stock indices like the S&P 500 is a wise move. Such strategies could profit from the broad market sell-off that could occur if carry trades unwind. This is a defensive approach to protect against unexpected volatility. Simultaneously, the administration’s recent change in stance on tariff threats against key European allies has removed a significant obstacle to global growth. This improvement enhances the outlook for European stocks compared to U.S. stocks. Therefore, it may be worthwhile to consider call options on European indices like Germany’s DAX to take advantage of this positive development. Create your live VT Markets account and start trading now.

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