
On Tuesday, the yen hovered near a three-month low following the weekend elections in Japan, where the ruling coalition lost its parliamentary majority. This outcome introduced uncertainty regarding the country’s political and monetary future. Meanwhile, the dollar experienced a slight decline but remained close to its recent peak ahead of significant U.S. data releases later in the week, which could influence Federal Reserve policy decisions.
The yen experienced a minor increase, trading at 153.12 per dollar, after reaching its lowest level since July at 153.885 on Monday. This drop occurred after Japan’s national election on Sunday left the future government composition uncertain. The Liberal Democratic Party, along with its junior partner Komeito, won 215 lower house seats, falling short of the 233 needed for a majority, indicating a potential period of coalition negotiations.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, suggested that there is a potential for looser fiscal policy under the new government. She noted that combined with strong U.S. economic data and the increasing likelihood of a Donald Trump victory, political uncertainty in Japan could exert upward pressure on the dollar/yen in the coming weeks. Market volatility might prompt the Bank of Japan (BOJ) to maintain its interest rate policy for longer than previously expected. The yen also struggled against the euro and sterling, trading near a three-month low at 165.73 and 198.72, respectively. The BOJ is set to announce its monetary policy decision on Thursday, with expectations that rates will be held steady.
The dollar was on track for its best month in two and a half years, aiming for a 3.5% gain against a basket of currencies. Robust economic data highlighting the resilience of the U.S. economy, along with increasing market speculation about a possible win by Republican candidate Donald Trump in the upcoming U.S. presidential election, has strengthened the dollar over the past month. Trump’s policies on tariffs, taxes, and immigration are viewed as inflationary, negatively impacting bonds while boosting the dollar.
Upcoming important U.S. data includes the September reading of the core personal consumption expenditures price index— the Federal Reserve’s preferred inflation measure— due on Thursday, followed by the closely-watched nonfarm payrolls report on Friday. Ray Attrill, head of FX strategy at the National Australia Bank, commented that Friday’s employment numbers and the PCE inflation reading will be crucial, and though the election remains a significant factor, data outcomes could lead to price adjustments.
In the early Asian session, the dollar saw a slight dip yet remained within a narrow range as investors were cautious about taking new positions before the data releases. The euro appreciated by 0.05% to $1.0816, and sterling increased by 0.03% to $1.2976. The dollar index remained fairly stable at 104.28. In other currency movements, the New Zealand dollar decreased by 0.08% to $0.5976, and the Australian dollar fell to its weakest in over two months at $0.6572. Attrill suggested that the Australian dollar might be notably affected if a negative reaction occurs in the emerging market next week following news of a potential Trump victory. Meanwhile, China’s offshore yuan was last recorded at 7.1447 per dollar.