The Japanese yen fell to its weakest level against the US dollar since July 2024 on Tuesday, as traders positioned ahead of an expected Japanese election, while the currency also hit record lows against several European currencies, at a time when the dollar itself remains under pressure from concerns over the independence of the Federal Reserve.

Analysts said those concerns — which erupted after the administration of US President Donald Trump opened a criminal investigation into Fed Chair Jerome Powell — continue to represent the most important long-term risk factor for markets.

However, with the administration’s move facing criticism from prominent figures within the Republican Party itself, its impact on day-to-day price action has so far been limited.

Instead, the Japanese yen became the main market driver, briefly weakening beyond the 159 level per dollar, its softest since July 2024.

The move followed a report by Kyodo News stating that Japanese Prime Minister Sanae Takaichi had told a senior ruling-party executive that she intends to dissolve the lower house of parliament at the start of the regular Diet session scheduled for January 23.

In the latest trading, the dollar rose 0.5% against the yen to 158.9.

An election victory could further boost the “Takaichi trade”

Takaichi has been leading opinion polls, and a decisive election victory could reinforce what is known as the “Takaichi trade” — a market view that her preference for greater fiscal stimulus would lift equities, push bond yields higher, and weaken the yen.

That scenario played out in Tuesday’s trading, with Japan’s Nikkei stock index hitting a fresh record high, while yields on 30-year Japanese government bonds jumped by around 12 basis points.

The yen also fell to record lows against both the euro and the Swiss franc, and slid to its weakest level versus sterling since August 2008.

Will Japan intervene to halt the yen’s slide?

For currency traders, the key question remains whether — and when — Japanese authorities might step in directly to curb the yen’s decline.

Nick Rees, head of macro research at Monex Europe, said that “160 yen to the dollar is the obvious next level, although the yen could fall further — it’s less about specific levels and more about the speed of the move.”

He added that focusing on price levels can help “anchor market psychology.”

Japan’s Finance Minister Satsuki Katayama previously said that she and US Treasury Secretary Scott Bessent share concerns about the yen’s recent weakness, as Tokyo has stepped up warnings about possible intervention to stem the currency’s fall.

Powell investigation unsettles investors

Other currencies were largely steady, holding on to gains from the previous session.

The euro was little changed at $1.1671 after rising 0.27% in the prior session, while sterling gained 0.14% to $1.3475, extending Monday’s 0.47% advance.

The Swiss franc was steady at 0.7976 per dollar, while the dollar index edged up slightly to 99.01 after posting its worst daily performance in three weeks in the previous session.

Later in the day, US consumer price index data is expected to drive further dollar moves.

Consumer inflation is forecast to have accelerated in December, as some temporary disinflation effects linked to the November government shutdown faded. However, uncertainty over the shutdown’s impact means the data could deliver surprises.

That could add to volatility in the dollar, which is already being buffeted by speculation around the Federal Reserve and broader political developments this year, despite the absence of a clear directional trend.

“I would have expected, given everything going on, to see a clearer trend,” Rees said.

“But you could argue that forces are pulling in opposite directions — the Federal Reserve is a negative factor for the dollar, yet for now markets still view the dollar as a safe haven amid geopolitical developments.”

Gold prices retreated in European trading on Tuesday for the first time in four days, pulling back from record highs amid corrective moves and profit-taking, in addition to renewed pressure from a stronger US dollar against a basket of global currencies.

Later today, markets await the release of key US inflation data for December, which is expected to provide strong signals on the future path of interest rates set by the Federal Reserve.

Price overview

• Gold prices today: Spot gold fell by more than 0.5% to $4,573.71, from an opening level of $4,597.93, after posting an intraday high at $4,607.90.

• At Monday’s settlement, the precious metal gained 2.0%, marking a third consecutive daily advance and recording an all-time high at $4,630.36 per ounce.

• Those gains were supported by escalating global geopolitical tensions surrounding Iran, Venezuela, and Greenland, in addition to renewed concerns over the independence of the Federal Reserve following the opening of a criminal investigation involving Jerome Powell.

US dollar

The US dollar index rose by 0.15% on Tuesday, resuming gains that had paused temporarily the previous session, reflecting renewed strength in the US currency against a basket of major and secondary currencies.

Investors are still assessing the implications of the Trump administration’s investigation into Powell, a move that drew criticism from former Federal Reserve officials and marked a sharp escalation in Donald Trump’s campaign to pressure the central bank into cutting interest rates at a faster pace.

US interest rates

• According to the CME FedWatch Tool from the CME Group, market pricing shows a 95% probability that US interest rates will remain unchanged at the January 2026 meeting, versus a 5% probability of a 25-basis-point rate cut.

• Investors are currently pricing in two US rate cuts over the coming year, while Federal Reserve projections point to a single 25-basis-point cut.

US inflation data

To reassess the above expectations, traders are awaiting the release later today of headline US inflation data for December, which is expected to have a meaningful impact on the Federal Reserve’s monetary policy trajectory this year.

Gold outlook

Kyle Rodda, market analyst at Capital.com, said that some investors may be seeking short-term profits, but as seen on Monday, dips during Asian trading hours can be quickly absorbed.

SPDR Gold Trust

Gold holdings at the SPDR Gold Trust, the world’s largest gold-backed ETF, rose by about 6.24 metric tons on Monday, lifting total holdings to 1,070.80 metric tons, the highest level since December 29.

The British pound rose in the European market on Tuesday against a basket of global currencies, extending its recovery for a second consecutive session from a three-week low against the US dollar, supported by weakness in the US currency ahead of the release of key US inflation data for December.

With expectations for a Bank of England interest rate cut in February remaining weak, investors are awaiting later today a speech by Bank of England Governor Andrew Bailey at an event hosted by the UK central bank, which is expected to provide fresh clues on the trajectory of UK monetary policy over the course of this year.

Price Overview

• British pound exchange rate today: The pound rose 0.1% against the dollar to $1.3476, from an opening level of $1.3466, with the session low recorded at $1.3462.

• On Monday, the pound gained around 0.5% against the dollar, marking its first daily gain in five sessions, after earlier touching a three-week low at $1.3391.

• Beyond bargain buying from lower levels, the pound was also supported by rising concerns over the independence of the Federal Reserve.

US Inflation

Key US inflation data for December are due later today, and are expected to shed light on the extent of inflationary pressures facing Federal Reserve policymakers.

At the same time, investors are still digesting the implications of the Trump administration’s investigation into Jerome Powell, a move that has drawn criticism from former Federal Reserve officials and marked a sharp escalation in President Donald Trump’s campaign to pressure the central bank into cutting interest rates at a faster pace.

UK Interest Rates

• Market pricing for a 25-basis-point interest rate cut by the Bank of England at its February meeting remains below 20%.

• To reassess these expectations, investors are closely watching later today the speech by Governor Andrew Bailey, which is expected to include strong signals regarding the future path of UK monetary policy this year.

Outlook for the British Pound

At Economies.com, we expect that if Andrew Bailey’s comments come across as more hawkish than markets anticipate, expectations for a February rate cut will decline further, which would support additional upside in the British pound.

The Japanese yen weakened in the Asian market on Tuesday against a basket of major and minor currencies, extending its losses for a sixth consecutive session against the US dollar and hitting an 18-month low, after reports said that Japanese Prime Minister Sanae Takaichi intends to dissolve the lower house and call for early elections in the near term.

The yen is also under pressure from easing inflationary pressures on Bank of Japan policymakers, which has led to a decline in expectations for a Japanese interest rate hike later this month.

Price Overview

• Japanese yen exchange rate today: The US dollar rose 0.5% against the yen to ¥158.91, the highest level since July 2024, from an opening level of ¥158.132, with the session low recorded at ¥157.90.

• The yen ended Monday’s trading down 0.15% against the dollar, marking its fifth consecutive daily loss, due to political uncertainty in Japan.

Early Elections

Japan’s public broadcaster NHK reported on Monday that Prime Minister Sanae Takaichi is seriously considering dissolving the lower house and calling an early general election in February.

Kyodo News reported on Tuesday that Takaichi has informed ruling party leadership of her intention to dissolve the lower house (parliament) at the start of its regular session scheduled for January 23.

Hirofumi Yoshimura, leader of the Japan Innovation Party and a coalition partner in the ruling government, said that Takaichi may call an early general election.

The move to dissolve the current parliament comes as Takaichi seeks to strengthen her public mandate and secure a comfortable parliamentary majority to ensure passage of the fiscal year 2026 budget and proposed economic reforms, particularly as the current government faces difficulties passing legislation in a divided parliament.

These reports have fueled political uncertainty among investors, which was immediately reflected in yen movements in foreign exchange markets, as markets assess the potential impact of early elections on future Bank of Japan decisions regarding interest rate hikes.

Japanese Interest Rates

• Market pricing for a quarter-point interest rate hike by the Bank of Japan at its January meeting remains below 10%.

• The Bank of Japan meets on January 22–23 to assess domestic economic developments and determine appropriate monetary tools during this sensitive phase for the world’s fourth-largest economy.