Japanese Yen struggles to gain ground despite softer US Dollar

• USD/JPY struggles for direction as the US Dollar retreats from recent highs.
• Fed Chair Warsh avoids fresh policy guidance as markets anticipate another rate hike in December.
• The Japanese Yen struggles to gain ground despite hawkish signals from BoJ policymakers.

USD/JPY is little changed on Friday but heads for its first weekly loss in five weeks amid a sharp decline in the US Dollar (USD). However, the Japanese Yen (JPY) finds only limited support as its fundamental backdrop remains fragile. At the time of writing, USD/JPY trades around 158.05, extending the sideways price action in place since late September.

The US Dollar slides to two-week lows, weighed down by a sharp turnaround in US Treasury yields as concerns over AI-related investments trigger selling in equities and drive investors toward government bonds.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.72 after reaching 102.94 earlier this week, its highest level since April 2025.

The Dollar’s decline comes despite hotter-than-expected US inflation data released this week, which strengthened expectations that the Federal Reserve (Fed) could deliver another rate hike this year. However, policymakers appear non-committal about back-to-back increases, with markets widely expecting a pause at the October 27-28 meeting.

Speaking in Bangkok on Friday, Fed Chair Kevin Warsh stuck to his stance of avoiding forward guidance, saying, “I don't prejudge meetings.” He also reiterated the central bank’s commitment to fighting inflation, stating, “We made very clear that we would deliver price stability.”

With inflation remaining above the Fed’s 2% target, traders see December as the more likely timing for another increase. The CME FedWatch Tool shows roughly a 90% probability of a December rate hike.

Meanwhile, the Bank of Japan (BoJ) remains on a gradual tightening path, although this provides limited support to the Japanese Yen. Japan’s relatively low interest rates and concerns over its heavy government debt burden remain headwinds, while the wide gap between US and Japanese bond yields favours Dollar-denominated assets.

On Friday, BoJ Governor Kazuo Ueda said that “Accommodative financial conditions continue to support economic activity even after September rate hike.” Ueda also warned, “There is risk of underlying inflation overshooting 2% price target.” On the policy outlook, he said, “Pace and timing of future policy adjustment will be decided based on likelihood of our baseline projections materialising as well as risks.”

His comments follow remarks from BoJ board member Junko Koeda on Thursday, who said, “with significant upside risks to prices and ongoing loose financial conditions, BOJ should not be too cautious about raising policy interest rates.” She also suggested that Japan’s neutral interest rate lies well above 1%.