The Japanese yen is facing its sharpest weekly decline in over a year, while the euro is hovering near two-month lows. This dramatic shift is due to political uncertainties and the potential impact on monetary policies.
The Yen's Plunge: A Political Battle?
The yen's recent drop has been attributed to concerns that the Bank of Japan (BOJ) may not raise interest rates again this year. This comes after the surprising victory of fiscal dove Sanae Takaichi, who is now set to lead the ruling party. Takaichi's stance has raised worries about the need for government intervention to support the yen.
Japanese Finance Minister Katsunobu Kato expressed concern over excessive volatility in the foreign exchange market. Takaichi herself acknowledged her desire to prevent excessive declines in the yen. Currency strategist Carol Kong highlights that markets believe Takaichi's leadership will make it politically challenging for the BOJ to raise interest rates.
Takaichi, on track to become Japan's first female prime minister, emphasized the BOJ's responsibility for monetary policy but stressed the need for alignment with the government's goals.
Traders are currently pricing a 45% chance of a rate hike from the BOJ in December, with a fully priced-in 25 basis point hike expected in March.
Euro's Woes: French Political Turmoil
The euro is also suffering, anchored near two-month lows due to political turmoil in France. President Emmanuel Macron is searching for his sixth prime minister in less than two years, a challenging task given the crisis-ridden legislature.
The political paralysis has made it extremely difficult to pass a budget with austerity measures, which are demanded by investors concerned about France's growing deficit.
Kieran Williams, head of Asia FX at InTouch Capital Markets, stated, "In France, turmoil following the resignation of Prime Minister Lecornu has undermined EUR sentiment."
This political uncertainty, coupled with shifting central bank expectations, has elevated volatility across FX markets.
Dollar's Rise: A Controversial Move?
The dollar, on the other hand, is upbeat, with the dollar index near a two-month high. Head of research at Pepperstone, Chris Weston, noted that the recent dollar rally has gone against market positioning, prompting a partial covering of USD shorts.
Weston added, "There remains a high degree of skepticism that the USD can materially push through 100, a level in the dollar index that was quickly reversed in May."
With the U.S. government shutdown ongoing and limited economic data, markets are closely monitoring policymakers' comments. New York Federal Reserve President John Williams signaled his comfort with cutting interest rates again, despite concerns about rising inflation.
Traders are pricing a 95% chance of a 25 bps rate cut by the Federal Reserve in October, with odds of an additional cut in December dropping to 80% from 90% in the past week.
Other Currencies: Mixed Bag
In other currencies, the Australian dollar firmed slightly, while sterling remained near its two-month low. The New Zealand dollar hovered near its six-month low after the central bank's unexpected rate cut, signaling concerns about the economy and the possibility of further easing.
This week's currency movements highlight the impact of political and economic uncertainties on global markets. With the potential for further volatility, it remains to be seen how these currencies will fare in the coming weeks.
And this is the part most people miss: the intricate dance between politics and economics, shaping the fate of currencies worldwide. What do you think? Will the yen's fall continue, or will it rebound? Share your thoughts in the comments!
