USD/JPY strengthens as US yields rise and Dollar gains momentum

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The Japanese Yen (JPY) weakens against the US Dollar (USD) on Tuesday, with USD/JPY reversing the previous day’s losses as the Greenback strengthens across the board, while US Treasury yields move higher. At the time of writing, the pair is trading around 156.70, up nearly 0.23% on the day.

The Japanese Yen trades lower amid higher US yields and a broadly stronger Dollar.
Softer US PMI data fails to derail the Dollar’s rebound.
Fed cut bets, BoJ tightening prospects, and geopolitical risks remain in focus.

Softer US Purchasing Managers Index (PMI) data released earlier in the session did little to dent the Dollar’s momentum. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of currencies, is hovering around 98.53 after hitting a daily low of 98.16.

According to the latest S&P Global survey, the US Services PMI slipped to 52.5 in December from 54.1 in November and was revised lower from the preliminary estimate of 52.9. The Composite PMI also eased, falling to 52.7 from 54.2, reflecting slower expansion across both the manufacturing and services sectors.

Despite the near-term recovery in the Greenback, the broader US Dollar outlook remains fragile, with markets pricing in two Federal Reserve (Fed) rate cuts over the course of the year. However, policymakers remain divided over the pace and timing of further easing after last year’s cumulative 75-basis-point cut.

That said, the Fed is widely expected to keep interest rates unchanged at the January 27-28 meeting, with CME FedWatch showing about an 85% probability of a hold.

Traders are also closely monitoring developments between the United States and Venezuela following last weekend’s military strikes and the ousting of Venezuelan President Nicolás Maduro.

The escalation has kept geopolitical risk in focus, with any further signs of military action likely to fuel safe-haven demand for the US Dollar and support USD/JPY.

In contrast to the Fed, the Bank of Japan (BoJ) is widely expected to raise interest rates in the months ahead as it continues to move along a gradual path toward policy normalisation. BoJ Governor Kazuo Ueda reiterated the central bank’s hawkish bias on Monday, saying that policymakers will “keep raising rates in line with improvements in the economy and inflation.”

Moreover, persistent Yen weakness strengthens the case for further BoJ tightening, while also reviving concerns over possible intervention. Japanese officials have issued repeated verbal warnings in recent weeks, underlining their unease with sharp moves in the currency.

Looking ahead, Japan’s data docket remains light, with the Jibun Bank Services PMI due on Wednesday and Labour Cash Earnings figures on Thursday. In the United States, traders are bracing for a heavy slate of labour market data, with the focus on Friday’s Nonfarm Payrolls report, which could shape near-term expectations for the Fed’s monetary policy path.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.