• The US Dollar gives back early gains after disappointing US manufacturing data undermined initial safe-haven support.
• Weaker ISM data revive concerns over US industrial momentum and weigh on the Dollar.
• The Japanese Yen benefits from a risk-off environment and rising Japanese Bond yields.

USD/JPY trades lower around 156.30 on Monday at the time of writing, down 0.40% on the day, after giving back part of its earlier gains. The pair reflects a reversal in sentiment toward the US Dollar (USD), which had been supported earlier by safe-haven flows amid heightened geopolitical tensions in Latin America.

On the US side, the US Dollar (USD) initially drew support from market nervousness following the announcement of the capture of Venezuelan President Nicolas Maduro by the United States (US), an event that has revived geopolitical concerns and boosted demand for safe-haven assets. However, this support proved short-lived. The release of the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) shows a decline to 47.9 in December, from 48.2 in November and below market expectations. This third consecutive drop confirms a deeper contraction in US manufacturing activity, driven by declines in production and inventories, even as price pressures remain elevated.

These figures reinforce the idea of a gradual slowdown in the US economy and add nuance to growth prospects. Markets therefore continue to price in two additional interest rate cuts by the Federal Reserve (Fed) in 2026. Investors also remain attentive to the possibility that US President Donald Trump could nominate a new Fed Chair when Jerome Powell’s term ends in May, a scenario seen as potentially favoring a more accommodative monetary policy stance. Minutes from the latest Federal Open Market Committee (FOMC) meeting further show that several officials consider it appropriate to pause further rate cuts as long as inflation continues to ease gradually.

Recent comments from Minneapolis Fed President Neel Kashkari, who said inflation remains too high but described the labor market as being in a low-hiring, low-firing environment, were not enough to stem selling pressure on the US Dollar.

Against this backdrop, the weaker US Dollar supports the Japanese Yen (JPY). The Japanese currency fully benefits from the risk-off environment, while also drawing support from rising domestic yields. Japanese government Bond yields have climbed to their highest levels since 1999, strengthening the appeal of the Japanese Yen (JPY). The narrowing yield differential between the United States and Japan also favors the Japanese currency.

In the near term, USD/JPY remains sensitive to shifts in overall market sentiment, upcoming US macroeconomic data and the trajectory of Bond yields, in an environment dominated by geopolitical uncertainty and monetary policy expectations.