FX Weekly

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USD sell-off reinforced by JPY intervention risk

FX View:

The USD’s upward momentum at the start of the year has come to an abrupt halt amid heightened uncertainty around U.S. policy. President Trump’s threats to take control of Greenland and impose tariffs on fellow NATO members were quickly rescinded, but they may nonetheless have a more lasting negative impact on investor confidence in U.S. policymaking. Recent developments could encourage foreign investors to further increase FX hedging of U.S. asset exposures, adding to USD selling pressure. At the same time, the avoidance of a tit‑for‑tat trade war between the U.S. and the EU is a supportive development for the global growth outlook. G10 commodity currencies, such as the AUD, have continued to outperform at the start of the year, reflecting in part growing optimism about stronger global growth in 2026. Finally, reports of rate checks by the Federal Reserve Bank of New York on Friday have reinforced the USD sell‑off, with USD/JPY falling by almost six big figures. 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.

BROAD-BASED USD SELL-OFF

Source: Bloomberg, 16:15 GMT, 23rd January 2026 (Weekly % Change vs. USD)

Trade Ideas:

We are maintaining our long EUR/JPY and long AUD/GBP trade ideas.

IMM Positioning:

The latest IMM weekly positioning data to the week ending 20th January, which was released on Friday evening, revealed a further pick-up in GBP long positions held by Leveraged Funds. Positive buying momentum amongst Leveraged Funds has been evident for some time with long positions increasing for the eighth consecutive week.

Sentiment Analysis on the latest BOJ Press Conference:

The Hawk–Dove Index shows Governor Ueda’s Q&A tone remains net dovish at all meetings in our sample, although the degree of dovishness has moderated recently.

FX Views

USD/JPY: Joint intervention risk reinforces USD sell-off   

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. As a result, the dollar index has fallen back toward the lower end of the 96.00–100.00 trading range that has been in place since Q2 of last year. The USD has been consolidating at lower levels against other major currencies, including the EUR, GBP, and CHF. In contrast, it continues to weaken against the AUD and SEK. Over the past week, the AUD has risen to its strongest level against the USD since autumn 2024, prior to President Trump’s election victory, while USD/SEK has fallen to its lowest level since early 2022, ahead of Russia’s invasion of Ukraine. The JPY has also strengthened sharply, driven by speculation over the imminent risk of intervention after USD/JPY briefly reached a high of 159.23 on Friday before abruptly reversing the weakening trend that had dominated recent months.

The USD has corrected lower over the past week, even as U.S. yields have continued to move higher at the start of the year. The 2‑year U.S. Treasury yield has risen by around 20bps as market participants have scaled back expectations for further Fed easing. The Fed is now expected to keep rates on hold until a new Fed Chair is in place, potentially as late as the June FOMC meeting. Expectations for the timing of further rate cuts have been pushed back amid growing evidence of stronger U.S. cyclical momentum heading into this year. Growth is expected to receive additional support from President Trump’s “One Big Beautiful Bill,” as well as from the boost to activity associated with the U.S. hosting the World Cup. At the same time, President Trump’s public attacks on the Fed’s independence could make FOMC participants more cautious about voting for further rate cuts in the near term.

The recent divergence between USD performance and yield spreads has been driven by a renewed increase in U.S. policy uncertainty, which has weighed on the USD much as it did last year. President Trump’s threats toward fellow NATO allies over Greenland, while short‑lived, may nonetheless have a more lasting negative impact on investor confidence and could further encourage foreign investors to increase FX hedging on U.S. asset holdings. This comes at a time when President Trump has launched a fresh attack on the Federal Reserve’s independence, threatening Chair Powell with a potential criminal indictment related to his testimony to Congress on cost overruns associated with a Federal Reserve headquarters renovation project. While we do not expect these attacks to force the Fed to cut rates, they are likely contributing to a gradual erosion of investor confidence in U.S. policymaking, which remains a headwind for USD performance. Second, the weaker USD may also reflect growing investor optimism around the outlook for stronger global growth this year. The outperformance of commodity‑linked G10 currencies such as the AUD, alongside gains in Latam FX at the start of the year, has been supported by improving global growth expectations and rising commodity prices. The SEK also stands to benefit, given Sweden’s status as a small and open economy. 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.

JPY WEAKNESS IS BECOMING MORE EXTREME

Source: Bloomberg, Macrobond & MUFG GMR

USD DIVERGES FROM YIELD SPREADS

Source: Bloomberg, Macrobond & MUFG GMR

At the same time, 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. The almost six‑big‑figure decline has been driven by intensified speculation over the risk of imminent intervention to support the JPY. The scale of the yen’s rebound has been fuelled by reports that the Federal Reserve Bank of New York contacted financial institutions on Friday to ask about conditions in the JPY market. These reports have in turn stoked speculation that any intervention could potentially involve the U.S. buying JPY and selling USD. Joint intervention by Japan and the U.S. would likely have a more powerful and lasting impact on lowering USD/JPY.

Both Japanese authorities and the Trump administration have expressed concern about yen weakness. Treasury Secretary Bessent has previously called on the Bank of Japan to accelerate monetary tightening to address JPY depreciation, which could represent one possible condition for U.S. participation in coordinated intervention with Japan. U.S. involvement would also send a strong signal that the administration wants a weaker USD. While this is not our base‑case scenario, it cannot be completely ruled out. The last time Japan and the U.S. intervened together in the FX market was in March 2011, following the Tohoku earthquake, when they sold JPY alongside other G7 members. In more recent episodes, Japan has acted unilaterally when intervening to support the JPY, including during its most recent intervention in July 2024.

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. On that occasion, the S&P 500 equity index fell by almost 10% as risk assets were hit hard by the rapid carry unwind. Such a development would threaten the recent outperformance of high‑beta carry currencies, including the AUD among G10 currencies, as well as emerging market currencies that have benefited from a weaker USD, rising commodity prices, and a backdrop of low financial market volatility.

HIGHER FISCAL RISK PREMIUM HAD BEEN WEIGHING ON JPY

Source: Bloomberg, Macrobond &  MUFG GMR

JPY-FUNDED CARRY TRADE UNWIND RISK

Source: Bloomberg, Macrobond &  MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The Fed is expected to leave interest rates on hold in the week ahead, bringing to an end the run of three consecutive rate cuts delivered at the end of last year. Policymakers have signalled clearly in recent communications that a temporary pause is likely, allowing them to better assess how the US economy is evolving at the start of this year. The Fed has also suggested there is less pressure to continue lowering rates now that the policy rate is closer to estimates of neutral. Markets will therefore focus closely on the forward guidance for clues as to whether the Fed still intends to cut rates later this year. Notably, expectations for the next rate cut have been pushed back until after Fed Chair Jerome Powell’s term ends in May. Meanwhile, President Trump’s public attacks on the Fed’s independence risk backfiring, potentially making policymakers more reluctant to ease policy further.
• The Bank of Canada is expected to leave rates on hold for a second consecutive policy meeting. At the last policy meeting in early December, the BoC judged that the policy rate was “about the right level” to keep inflation close to 2.0% while helping the economy through a period of structural adjustment. While policymakers have not entirely ruled out further rate cuts and remain prepared to respond if the outlook changes, recent economic developments support market expectations that the BoC will keep rates on hold this year. As a result, we expect the upcoming policy meeting to have little impact on interest‑rate market pricing or the CAD.
• The main economic data releases in the week ahead include: (i) euro‑area GDP data for the fourth quarter, (ii) German inflation data for January, and (iii) Canadian GDP data for November. The euro‑area economy proved more resilient than expected to trade disruption in 2025, a trend that is likely to be confirmed by the upcoming GDP figures. President Trump’s rapid U‑turn in dropping his tariff threat related to Greenland has also helped to ease downside risks to euro‑area growth in 2026. Looking ahead, we expect firmer growth to continue this year, supported by looser fiscal and monetary policies alongside a lower inflation backdrop.