Fresh Takaichi policy uncertainty triggers renewed yen selling

USD: US trade policy uncertainty has muted negative impact

The US dollar has stabilized overnight following yesterday’s modest sell-off triggered by fresh US trade policy uncertainty. The dollar index briefly dipped to a low yesterday at 97.355 but has since fully reversed those initial losses. After the Supreme Court ruled to strike down President Trump’s IEEPA tariffs, he has acted quickly by signing an executive order to authorize a new 10% import tariff that went into effect overnight. The 10% baseline levy has been implemented under Section 122 of the 1974 Trade Act which allows the president to impose the charge for 150 days without congressional approval.  President Trump had also threatened over the weekend to raise the new tariff to 15% but has not yet officially issued a directive. According to Bloomberg, the White House is still working on a formal order that will increase the global tariff rate to 15% and the timeline for implementation has not been finalized. In response to the latest US trade policy developments, the EU has frozen the  ratification of its trade agreement with the US until there is more clarity over President Trump’s tariff plans. ECB President Lagarde noted that it’s “critically important” for global trade to “have clarity” from the US administration. According to Global Trade Alert, the biggest beneficiaries from the reduction in average tariff rates at least initially will be Brazil, China, India, Canada, Mexico and Vietnam. However, there has been no clear evidence so far of their domestic currencies outperforming on the back of the tariff reductions.                

The US dollar is still deriving support in the near-term from the scaling back of Fed rate cut expectations after last week’s hawkish FOMC minutes. While the reduction in tariffs could create more room for the Fed to lower rates later this year by helping to bring inflation back closer to target, it is unlikely to trigger a more immediate dovish shift in the Fed’s policy thinking. As the FOMC minutes highlighted last week, the Fed is not in a rush to resume rate cuts and the US rate market is not fully pricing in another cut until July. Fed Governor Waller who has still been calling for lower rates at the start of this year stated yesterday that his policy decision at the next FOMC meeting in March will depend on the upcoming labour market data. He acknowledged that it may be appropriate to keep rates on hold if the labour market data provides further evidence that downside risks to the labour market have diminished.  “But if the good labour market news of January is revised away or evaporates, it would in February, it would support my position at the FOMC’s last meeting, that a 25 basis point reduction in the policy rate is appropriate, and that such a cut should be made at the March meeting”. He has concerns that the January labour market data “may contain more noise than signal” particularly because data revisions in the report also showed job creation in 2025 was close to zero suggesting the labour market was “weak” and “fragile”. When asked about the latest US tariff developments, he stated  that he doesn’t expect them to have a significant impact on his view of the Fed should set policy. Overall, the developments are supportive for the US dollar to continue consolidating.

LEVERAGED FUNDS HAVE SHARPLY SCALED BACK YEN SHORTS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: PM Takaichi places pressure on BoJ to slow pace of BoJ hikes?

The yen has underperformed overnight resulting in USD/JPY rising back above the 156.00-level as it moves further above the low of 152.27 from 12^th February. The renewed yen sell-off overnight has been triggered by media reports that Prime Minister Takaichi is putting pressure on the BoJ to slowdown plans for further rate hikes. According to Mainichi, Prime Minister Takaichi voiced apprehension over any further rate hikes in a meeting with BoJ Governor Ueda last week citing unidentified people. The report added that Prime Minister Takaichi took a “tougher stance” than in their previous meeting in November which allowed the BoJ to resume rate hikes in December. It had been previously reported  last week that Prime Minster Takaichi made no specific requests when she met with BoJ governor Ueda. The Mainichi report will put a dampener on market expectations for the BoJ to speed up the pace of tightening by raising rates as soon as in April. There are currently around 15bps of hikes priced in for April which could be scaled back and encourage further yen selling.

At the same time, the Nikkei has reported that US Treasury Secretary Scott Bessent personally led the January “rate check” which helped the yen to rebound sharply according to senior US officials, in a move designed to stabilise markets rather than respond to a formal Japanese request. Officials stated that US Treasury Secretary Scott Bessent was concerned about broader market instability during what he described as a “political vacuum”, as well as spill-overs in global bond markets. Officials said Bessent believed markets were misreading signals from Japan’s bond market and feared higher global yields could undermine broader financial stability. Japan’s Ministry of Finance officials had not requested either a rate check or coordinated intervention at the time. However, Washington would have considered joint action had Tokyo asked. The report could also create the impression that Japan is less concerned by yen weakness reinforcing selling overnight alongside speculation that the government will pressure the BoJ to slowdown policy tightening.   

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Source: Bloomberg & Investing.com