BIS Real Effective Exchange Rate (REER) indices, measured by their change over the last five years, show the euro and US dollar converged in valuation over the past six months. The Japanese yen remains undervalued on a REER basis.
US–Japan coordination on exchange rates is described as already in progress. Further moves in the euro and dollar range are linked to structural drivers such as US technology strength and European defence-related autonomy.
Japan is described as having lacked a comparable boost, with the yen instead showing a longer-run depreciation. This is framed as different from a simple failure to appreciate.
Sustained yen weakness is presented as a bigger competitive risk for Eurozone exporters than for the United States, due to export rivalry. The article notes this competition has weakened over time, especially in the automotive sector, where China has disrupted global markets.
During US Treasury Secretary Scott Bessent’s trip to Tokyo, USD/JPY saw another sharp, brief fall. Markets are set to watch month-end intervention figures to judge the Japanese Ministry of Finance’s actions, which are described as having limited effect so far.
The Japanese yen continues to be significantly undervalued, and we see the market testing new lows against the dollar. With USD/JPY currently trading near the 170 level, the interest rate gap between the US and Japan remains the dominant driver, overpowering official intervention efforts. As we saw back in 2024, intervention provides only temporary relief, making short-term volatility the most predictable outcome.
Given this tension, derivative traders should consider using options to manage the high uncertainty surrounding potential government action. Buying out-of-the-money puts on USD/JPY could be a cost-effective way to position for a sharp, albeit perhaps temporary, yen appreciation if Japan’s Ministry of Finance acts more decisively. Recent data for April 2026 shows Japan spent nearly ¥9 trillion intervening, a substantial figure, yet the yen’s slide continues, suggesting the underlying trend remains weak.
Europe is more exposed to this sustained yen weakness than the United States, which creates opportunities in currency crosses. The latest BIS data shows the yen’s real effective exchange rate at a new multi-decade low, sharpening the competitive edge for Japanese exporters against their Eurozone rivals, particularly in the auto sector. We should therefore watch for signs of verbal intervention from the European Central Bank, which could create downward pressure on the EUR/JPY pair.
Meanwhile, the valuation convergence between the euro and the dollar suggests the EUR/USD pair will likely remain range-bound in the near term. Without a major catalyst like a clear divergence in US tech leadership or European defense policy, a breakout seems unlikely. This environment is favorable for strategies that profit from low volatility, such as selling strangles or setting up iron condors on the EUR/USD pair.
