Amid rising bearish sentiment in the options market, the U.S. dollar declined for a third consecutive session, approaching its lowest level since 2022. The Japanese yen advanced toward its best two-day performance since April, after Japanese Prime Minister Sanae Takaichi stated the government is prepared to act against abnormal financial market volatility. The Bloomberg Dollar Spot Index fell as much as 0.6%, touching its weakest point since last September, pressured by factors including trade tensions with Canada and market speculation that the U.S. might launch a strike against senior Iranian leadership; the index pared some losses during afternoon trading in New York. The next critical level is the September 17 low of 1183.70; a breach of this level would mark the dollar's weakest performance since March 2022. The premium for betting on dollar weakness has climbed to a record high, indicating options traders are increasingly pricing in the risk that the U.S. administration will tolerate, or even support, a weaker dollar. The risk of a partial U.S. government shutdown is also weighing on the currency. "Against a backdrop of heightened U.S. domestic political tensions, the renewed risk of a U.S. government shutdown could serve as another negative factor currently pressuring the dollar, prompting investors to hedge or reduce excessive exposure to dollar-denominated assets," said Shaun Osborne, Chief FX Strategist at Scotiabank. Key event risks for U.S. markets this week include the January Fed meeting and the potential announcement by President Donald Trump of his nominee for the next Federal Reserve Chair. USD/JPY dropped as much as 1.5% to 153.31, its lowest level since November 7. Japanese Prime Minister Sanae Takaichi issued a fresh warning to financial markets, stating the government is ready to take action. Japan's top currency official, Atsushi Mimura, said Tokyo authorities will closely coordinate with Washington as needed and respond appropriately to currency movements. EUR/USD and GBP/USD extended their gains; EUR/USD rose 0.7% to a high of 1.1907. GBP/USD advanced 0.3% to 1.3678. USD/CAD reversed its decline, climbing 0.1% to 1.3716. USD/CHF fell 0.4% to 0.7769, remaining near its lowest levels since 2015.
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