USD Falls on Hawkish Comments from FOMC Minutes and JPY Strength

USD/JPY: Testing Key Support as Yield Differentials Narrow

The Japanese yen continues its strong performance in 2025, with USD/JPY hovering near the critical 150.00 level. This move brings the pair back to territory last seen in early December when support was found between 148.60 and 150.00. Year to date, the yen has appreciated 4.8% against the US dollar and 4.0% against the euro, reinforcing its status as the best-performing G10 currency so far this year.

USDJPY H1 Chart 

A key driver behind this movement has been the narrowing yield differentials between Japan and other major economies. The spread between 10-year US Treasury yields and Japanese Government Bonds (JGBs) has contracted by approximately 50 basis points from its January peak of 3.57%. Concurrently, the Japanese bond market has seen increased selling pressure, pushing 10-year JGB yields to 1.45%—a level not witnessed in over a decade. The rapid surge in Japanese yields has been fuelled by increasingly hawkish signals from the Bank of Japan (BoJ), reinforcing expectations that further rate hikes are on the horizon.

Despite speculation, BoJ Governor Ueda's recent meeting with Prime Minister Ishiba reportedly did not address Japan's rising yields. However, if the JGB sell-off accelerates, it could become a focal point in policy discussions, especially considering Japan’s upcoming Upper House elections. Currently, markets are pricing in around 21 basis points of hikes by the July policy meeting, with a lesser 15 basis points anticipated by June.

Recent economic data supports the case for further tightening. Japan's economy expanded more robustly than expected in the second half of 2024, even as the BoJ initiated rate hikes. Q4 GDP growth came in at 2.8% quarter-over-quarter, following a 1.7% expansion in Q3. Additionally, the BoJ remains confident that wage growth will continue to underpin inflation at its 2.0% target. Full-time base pay has been rising at a steady 3.0% annualized pace, aligning with Governor Ueda’s outlook. Market participants will now closely watch the Shunto wage negotiations in March for further confirmation of this trend.

USD: Hawkish Fed Minutes and Trade Policy Uncertainty

The US dollar has struggled to gain traction despite hawkish signals from the Federal Reserve. The US dollar index remains near 107.00, weighed down by growing concerns over trade policy uncertainty, particularly regarding former President Trump’s proposed tariff hikes. Trump has threatened to impose tariffs of approximately 25% on automobile, semiconductor, and pharmaceutical imports starting in April. This has triggered diplomatic pushback, with EU Trade Commissioner Maroš Šefčovič emphasizing the bloc’s readiness to negotiate but also warning of potential retaliation if these measures are implemented.

DXY H1 Chart 

The latest Federal Open Market Committee (FOMC) minutes indicate that policymakers remain cautious about adjusting monetary policy amid elevated inflation and political uncertainty. Most Fed officials acknowledged the need for a measured approach to rate decisions, noting ongoing ambiguity around the neutral rate and potential disruptions from Trump’s policies. Some officials even suggested that the current policy rate may not be far from its neutral level. Despite these hawkish undertones, US Treasury yields have failed to rise significantly, capping any meaningful upward momentum for the dollar.

With the yen gaining strength on yield dynamics and the dollar struggling amid trade tensions, USD/JPY remains a pair to watch closely in the coming weeks.

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