Yen Strengthens Amid Market Uncertainty: Key Drivers to Watch

The Japanese yen has recently drawn renewed attention from investors as global financial conditions shift. On Monday, the yen gained ground against the U.S. dollar, driven by a softer greenback and lingering uncertainty over the Federal Reserve’s policy trajectory. Growing concerns around global trade risks have also boosted demand for traditional safe-haven assets like the yen.

Currently, the USD/JPY pair is consolidating near 147.61. The yen has shown notable short-term strength, with technical analysts closely watching the 146.65 support level. A break below this threshold could open the door to further downside, potentially toward 143.25. On the flip side, if the dollar stages a rebound and pushes past 149.75, it could aim for 152.05 as the next upside target.

Despite a recent uptick in U.S. Treasury yields, their ability to prop up the dollar has been limited. Since April, the traditional positive correlation between the dollar and Treasury yields seems to have weakened—a signal that investors are increasingly uneasy about the U.S. economic outlook, fiscal sustainability, and overall stability. Many have started reducing their dollar-denominated safe-haven positions, adding to selling pressure.

Expectations around future Fed rate cuts also continue to evolve. The market now largely sees the possibility of no more than two rate cuts this year, with forecasts for the terminal rate still above the Fed’s own projections. If upcoming economic data out of the U.S. disappoints, the Fed could accelerate easing, further weighing on interest rates and the dollar.

Since the start of the year, the yen has gained approximately 6.75% against the U.S. dollar. While concerns about the U.S. government’s rising deficits and debt remain, Treasuries continue to be viewed as among the most liquid and creditworthy assets globally. That said, the dollar’s recent underperformance is prompting investors to reassess its role as a core safe-haven and reserve currency.

Looking ahead, the yen is likely to remain supported in the short term by a combination of dollar softness, policy uncertainty in the U.S., and heightened global risk sentiment. However, the dollar’s direction will ultimately hinge on upcoming economic data, Fed actions, and broader market sentiment. Investors would be wise to stay closely tuned to these developments and adjust their portfolios accordingly.