The Dollar faced broad weakness on Wednesday, especially versus the Yen and the Australian Dollar, as the Japanese currency continued to gain following Prime Minister Sanae Takaichi’s decisive election victory.
The greenback fell 0.75% against the Yen to 153.25, extending its losses to 2.5% since Friday’s close prior to Takaichi’s weekend win.
Meanwhile, the Euro also slipped 0.6% against the Yen to 182.46, marking a 1.8% decline since the election.
Many analysts had predicted the Yen would weaken following a strong win by Takaichi, who supports tax cuts despite Japan’s high debt levels. However, the currency’s gains have defied these expectations and are now partially fuelling further strength in a self-reinforcing cycle.
In addition, the Dollar also weakened against other major currencies. The Euro rose 0.16% to $1.1914, Sterling climbed 0.3% to $1.3680, and the US Dollar fell 0.25% versus the Swiss Franc, trading at 0.7659.
Overnight data added to the pressure, with US retail sales in December coming in below expectations, while a separate report showed that labour cost growth unexpectedly slowed in the fourth quarter.
US jobs data for January, postponed last week due to the brief government shutdown, could provide the next key test for the Dollar’s recent weakness later on Wednesday.
Furthermore, a Reuters survey of economists expects nonfarm payrolls to have risen by 70,000 in January, following a 50,000 gain in December. Any significant surprise, either above or below expectations, could influence market expectations for the Federal Reserve’s future policy moves.
Markets are currently pricing in around 60 basis points of Fed easing by December, despite comments from some policymakers suggesting that rates could stay on hold for an extended period.
Another standout performer was the Australian Dollar, which climbed above $0.71 for the first time since February 2023, last trading 0.4% higher at $0.7104.
Reserve Bank of Australia Deputy Governor Andrew Hauser stated that inflation remains too high and said that policymakers are committed to taking all necessary measures to rein it in.
Markets are currently pricing in roughly a 70% probability that the central bank will raise rates to 4.10% at its May meeting, following the release of first-quarter inflation data.