US Dollar Weakness and Fed Policy

The US Dollar is losing strength as people assess the Federal Reserve’s plans for monetary policy through 2026. Current data shows a 64.3% chance that the Fed will cut interest rates at least twice by the end of that year. The Fed’s dot plot suggests that the Federal Fund Rate could drop to 3.4% by 2026, indicating one more cut from the current range of 3.50% to 3.75%. The Tankan Large Manufacturing Index provides a glimpse into Japan’s economy, which relies heavily on manufacturing and exports. A score above 0 suggests positive conditions for the Japanese Yen (JPY), indicating strong manufacturing performance. As USD/JPY nears the 155.00 level, we see a clear sign of JPY strength due to a positive economic outlook. The Tankan survey’s four-year high indicates a solid manufacturing sector, leading us to believe that the Bank of Japan (BoJ) will raise rates this Friday. This change makes shorting the dollar against the yen an attractive option. Additionally, Japan’s national Core CPI for November was recently reported at 2.9%, remaining above the BoJ’s 2% target for over a year. This ongoing inflation gives the central bank a strong reason to tighten its policy. We recall that a similar strong Tankan index back in late 2021 led to significant shifts in global monetary policy.

Strategy for USD/JPY

On the other hand, the US Dollar is weakening as we expect the Federal Reserve to start cutting rates in 2026. The market anticipates at least two cuts by then, a prediction that could gain traction if tomorrow’s Nonfarm Payrolls data is disappointing. Analysts expect a modest 150,000 jobs added in November, down from 162,000 in October. Given this situation, derivative traders should think about buying USD/JPY put options to take advantage of a potential decline. Options with strike prices around 154.00 or 152.50 that expire in late January 2026 could provide substantial profits. This strategy allows us to make gains from a falling USD/JPY while clearly limiting our maximum risk. This is a sharp contrast to what we saw in 2022 and 2024, when we were focused on potential intervention from the Ministry of Finance to halt the yen’s decline below the 150 level. Now, the Bank of Japan’s official policies are the main force behind yen strength. The narrative has shifted from defending a weak yen to supporting a strong one. With significant events approaching, such as the US NFP report and the BoJ policy meeting this week, implied volatility is high. Buying put options is a smart way to express a bearish outlook on USD/JPY. It safeguards us against any unexpected changes from the BoJ that could lead to a sharp and unfavorable market shift. Create your live VT Markets account and start trading now.

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