Kit Juckes, Chief FX Strategist at Societe Generale, discusses the balance between US political pressure and Japan’s fiscal constraints.
While the dollar decline has been punchy and one-sided, the move was already underway before last Friday’s speculation of a USD/JPY rate check. The greenback has fallen across the board, with NOK, AUD and NZD gaining the most ground so far this month. Yen strength ultimately accelerated the move, turning what had been steady dollar selling into an avalanche into the weekend, capped by a clear “gap-and-go” lower at the Sunday open.
But positioning and price action are now starting to look stretched. While Washington has touted a weaker dollar to support export competitiveness, markets have been reluctant to accept prolonged misalignments with rates. The dollar has now meaningfully detached from a weighted basket of two-year yields, a signal of extreme selling pressure rather than a deterioration in fundamentals.
A similar decoupling last appeared in the wake of the Liberation Day tariffs, when the greenback traded at a deep discount to rates-implied fair value, then had to spend the second half of last year clawing that ground back. That discount has now reemerged, despite US growth estimates remaining relatively firm and front-end rates showing little sign of imminent relief.
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