Dollar declines against yen amid Japanese warnings

The USD/JPY pair fell 0.75% to around the 155.80 level during European trading on Tuesday. The pair is under heavy selling pressure amid broad weakness in the US dollar, as expectations grow that the Federal Reserve will implement deeper interest rate cuts in 2026 than those signaled in its monetary policy statement issued on December 17.

At the time of writing, the US dollar index (DXY), which tracks the greenback against six major currencies, was hovering near an 11-week low at around 97.85.

The CME FedWatch tool showed a 73.8% probability that the Federal Reserve will cut interest rates by at least 50 basis points next year. This contrasts with the Fed’s dot plot released last week, where policymakers collectively projected the federal funds rate to fall to 3.4% from its current range of 3.50%–3.75%, implying just one rate cut in 2026.

Dovish expectations for the Fed have been reinforced by signs of weakness in the labor market, as well as indications from a series of recent consumer price index (CPI) reports showing that the impact of tariffs on inflation has been limited.

Looking ahead, the preliminary third-quarter gross domestic product (GDP) report will be the next key catalyst for US dollar movements, scheduled for release at 13:30 GMT. Investors will closely watch the data for fresh signals on the resilience of the current economic backdrop.

Meanwhile, the yen’s outperformance added significant pressure on the pair following warnings of potential Japanese intervention in the foreign exchange market. Japanese Finance Minister Satsuki Katayama issued the remarks to support the currency against what she described as excessive and one-sided moves.

Earlier in the day, Katayama said that “Japan has full freedom to deal with excessive movements in the yen,” adding that the government would take “appropriate action against exaggerated moves.”