On Monday, the US dollar faced renewed pressure, falling to a fresh four-month low as market expectations for a joint US-Japan intervention in the foreign exchange market to bolster the yen intensified, becoming a key factor behind the dollar's weakness.
The ICE US Dollar Index (DXY) fell 0.6% on Monday to approximately 97, after touching an intraday low of 96.85, its weakest level since September of last year.
Furthermore, the index closed out its worst weekly performance since late May last Friday.
Investors noted that the New York Federal Reserve contacted some trading counterparts on Friday to inquire about market quotes for the USD/JPY pair, which was interpreted as a signal that the US might be preparing to participate in yen intervention.
The yen also strengthened against the dollar on Monday, with the exchange rate recovering to around 153-154 yen per US dollar.
In contrast, just two weeks ago, the yen was trading around 159, near its weakest level in three decades.
Due to the persistent interest rate differential between Japan and the United States, with Japanese rates being lower, the yen has long served as a "funding currency," where investors borrow cheap yen to invest in higher-yielding US assets, a practice known as the "carry trade."
However, the yen's recent strength is primarily driven by intervention expectations.
According to Amarjit Sahota, Director of analysis firm Klarity FX, the market has maintained a bearish outlook on the dollar for some time, while discussions about yen intervention are rapidly gaining momentum.
He pointed out that once the yen strengthens, investors will be forced to unwind their US stock investments funded by cheap yen, stating, "In a way, this is something that was bound to happen eventually."
Domestically in Japan, the market had previously pushed the yen lower on news that Prime Minister Takaichi Sanae planned to increase fiscal spending to stimulate the economy.
Driven by this, the yield on Japan's 40-year government bonds briefly surpassed 4%, reaching a record high.
Nevertheless, with intervention rumors multiplying, the yen has recently shown some recovery.
Market research firm Jefferies believes there is further room for the yen to appreciate.
Joseph Brusuelas, Chief Economist at RSM US, stated that he believes a joint US-Japan currency intervention is "imminent."
Conversely, Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, believes any intervention might only temporarily slow the depreciation trend, and a fundamental reversal of the yen's weakness would require changes in economic fundamentals.
Additionally, investor Michael Burry, famous for predicting the 2008 subprime mortgage crisis, also commented that the yen has "long been due for a trend reversal," which would bring a series of consequences.
Against the backdrop of the dollar's continued weakness, the ICE Dollar Index is approaching the lows seen last July and September, which were driven by trade tariff uncertainties and expectations of an economic slowdown.
Sahota noted that a break below the 96 level would suggest that the dollar's weakening trend, which had paused since last summer, could potentially restart.
"It's too early to say the dollar will fall sharply," he added, "but there is indeed a sense of downward pressure in the market right now."
Other factors pressuring the dollar on Monday included the risk of a potential US government shutdown, questions about the Federal Reserve's independence, rumors that former President Trump might replace Fed Chair Powell, and political uncertainty surrounding an upcoming Supreme Court ruling on Trump's tariff policies.
International investors continue to monitor the US stance on Greenland affairs and Japan's next moves.
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