The US Dollar is bouncing back after some recent losses, thanks to reports that Fed Governor Waller might replace Chair Powell. Appointed by Trump, Waller is viewed positively because of his dovish approach and support for the central bank’s credibility. US jobless claims have risen to 226,000, higher than the expected 221,000, compared to the previous 218,000. In the meantime, the St. Louis Fed President warned about how tariffs could affect inflation, suggesting that only one rate cut may happen this year, even though the market expects two cuts. In Japan, the Bank of Japan’s meeting summary expressed concerns about how US tariffs could impact the Japanese economy, possibly affecting future rate decisions. The BoJ has maintained a very loose monetary policy since 2013 to boost growth, which included Quantitative and Qualitative Easing (QQE) and setting negative interest rates. This approach has contributed to the Yen’s decline while other central banks have raised rates. As a result, the Yen has weakened, worsened by rising global energy prices, leading to higher inflation in Japan that exceeds the BoJ’s 2% target. Rising salaries in Japan are also contributing to this inflation, partly due to the BoJ’s earlier policies. Currently, the US Dollar is gaining strength because the market is now expecting fewer rate cuts from the Federal Reserve this year. Although weekly jobless claims have increased to 226,000, the key July 2025 inflation data came in a bit hotter at 3.4%. This supports the idea that the Fed will be careful, which helps the dollar for now. While the rise in jobless claims hints at some weakness in the labor market, it’s important to look at the overall situation. Last Friday’s major Non-Farm Payrolls report showed that the US economy added a solid 195,000 jobs. This indicates a cooling labor market rather than a collapse, giving the Fed less of a reason to rush into rate cuts. In Japan, we are closely watching for a major policy shift from the Bank of Japan, which has been showing more concern about the weak Yen and the effects of tariffs. Japan’s core inflation has remained above the BoJ’s 2% target for over a year, recently reaching 2.5%. This follows their historic decision in March 2024 to end the era of negative interest rates. For derivative traders, this creates a tense situation for the USD/JPY pair, which is currently trading around 162. The long-established strategy of buying dollar calls against the yen is becoming riskier as the reasons for policy divergence are shrinking. We believe options strategies that predict a cap on the upside or a gradual decline are becoming increasingly appealing. With mixed economic signals, we should expect more currency volatility in the coming weeks. Traders might consider buying straddles or strangles on major pairs like USD/JPY to profit from significant moves, regardless of direction. This allows them to take a position on rising uncertainty rather than betting on one specific outcome.

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