Yen falls to 18-month nadir

The Japanese yen fell to its weakest level in a year and a half against the US dollar on Wednesday, amid speculation that a potential early election could pave the way for fresh fiscal stimulus, prompting traders to reassess the likelihood of official intervention to support the currency.

The yen slipped as much as 0.2% to 159.45 per dollar earlier in the session, its lowest level since July 2024, before paring losses in volatile trading. The dollar later fell 0.3% to 158.66 yen by mid-European trading.

The Japanese currency has continued to weaken against most major counterparts, from the euro to the Mexican peso, over recent months, as investor concerns mount over Prime Minister Sanae Takaichi’s plans for expansive fiscal spending. Those concerns are seen as intensifying if an election is called next month and delivers a comfortable parliamentary majority.

With the yen approaching the 160-per-dollar level, market participants are increasingly alert to the risk of intervention by Japanese authorities. Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said the issue is less about the absolute level of the yen and more about the speed of its moves.

Intense focus on dollar/yen

Stretch said: “Clearly, the focus is on dollar/yen, but it’s also important to monitor the broader yen complex, as some crosses have moved sharply — euro/yen, for example, has reached record levels.”

He added: “Dollar/yen remains the primary focal point, but it is not the whole story. At this stage, the market appears to be watching how far moves can extend before intervention is seen as imminent or plausible.”

Over the past two months alone, the yen has lost around 3% against the dollar. Ahead of previous intervention episodes, such as in April and July 2024, the currency had fallen by close to 6% over a similar timeframe.

Japan’s Finance Minister Satsuki Katayama issued a fresh verbal warning on Wednesday, stating that authorities would take “appropriate action against excessive moves in the foreign exchange market, without ruling out any options.”

Dollar steadies after inflation data

The dollar held near its highest level in a month against a basket of major currencies following the release of US consumer inflation data on Tuesday, which largely matched expectations. The figures reinforced bets that the Federal Reserve will keep interest rates unchanged at its upcoming meeting, despite unprecedented pressure from the White House to cut rates.

The dollar had dropped sharply on Monday after US President Donald Trump threatened to pursue criminal charges against Federal Reserve Chair Jerome Powell, before central bank governors and senior Wall Street executives lined up to back Powell on Tuesday.

Brian Martin, head of G3 economics at ANZ in London, said: “There is a loud chorus of politicians, former Fed chairs, and other officials stressing that Federal Reserve independence is sacrosanct and should not be undermined.”

Focus on Supreme Court tariff ruling

Investors are also closely watching the possibility of a ruling from the US Supreme Court on the legality of Trump’s emergency tariffs.

ING analysts wrote in a research note: “The court may uphold the tariffs, in which case the market will move on. We expect them to be struck down, but even then the market is likely to move on.”

They added: “US bond markets continue to show a remarkable ability to look through much of this noise.”

Against the offshore Chinese yuan traded in Hong Kong, the dollar was steady at 6.9752 after December trade data showed the world’s second-largest economy ended the year with a record surplus of nearly $1.2 trillion.

In other currency markets, the euro was steady at $1.1646, while sterling rose 0.2% to $1.3447.