The USD's upward momentum has halted due to increased uncertainty surrounding U.S. policy, according to MUFG's Lee Hardman and Abdul-Ahad Lockhart. Investor confidence has been negatively impacted by President Trump's recent threats, leading to increased FX hedging of U.S. assets. The report highlights a significant decline in USD/JPY and discusses the implications of potential U.S.-Japan intervention.

USD faces significant selling pressure

"The USD has suffered a setback over the past week. A lower close for the dollar index at the end of last week brought an end to a run of three consecutive weekly gains at the start of the year."

"Although joint intervention by the U.S. and Japan is not our base-case scenario, such an outcome would send a strong signal that the Trump administration wants a weaker USD."

"The USD sell-off has been reinforced by a sharp rebound in the yen, which has seen USD/JPY fall from a high of 159.23 on Friday to a low of 153.40 today."

"If the JPY continues to strengthen, market participants are likely to become increasingly wary of the risk of a more disruptive unwind of JPY-funded carry trades, similar to what was seen between July and August 2024."

"President Trump’s rapid policy U-turn in dropping the threat of higher tariffs on fellow NATO members, including France, Germany, and the UK, has helped ease downside risks to global growth by reducing the likelihood of another tit-for-tat trade war between the U.S. and the EU."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)