The US Dollar holds the yield advantage: Why safe-haven demand still sank it against the Japanese Yen

The US Dollar (USD) saw a significant decline against the Japanese Yen (JPY), with the currency pair dropping from the 158.20 level to lows around 156.08. This decline was driven by falling US Treasury yields and a surge in safe-haven demand for the Yen amid rising geopolitical risk. Despite the US Dollar holding broad-based yield advantages across most major currency pairs, its momentum against the JPY is challenged by higher Japanese inflation metrics and strong private sector growth.

Both UOB and BBH strategists are assessing whether this steep oversold decline signifies a temporary tactical pullback within the 155.00–160.00 trading range or the beginning of a deeper structural unwinding. UOB analysts note the sudden acceleration in USD/JPY downside momentum, which broke out of its recent 157.70–158.80 range down to 156.67.

While technical indicators are highly oversold in the short term, they expect the USD/JPY to continue its decline towards 156.00 before stabilizing, with key resistance now at 157.30.

The sharp drop to 156.67 suggests that the USD may continue to decline further. Support levels are identified at 156.00 and 155.50, while a break above 157.80 would indicate that the USD is not in a prolonged decline. Despite being deeply oversold, the decline could potentially extend to 156.00 before stabilization occurs.

Japanese Yen continues to lead global currency gains as investors seek refuge during market volatility. Hotter Japanese inflation metrics (2.4% core CPI) and resilient PMI data (52.3) bolster the case for Bank of Japan (BoJ) rate hikes. However, low market expectations for an October rate move (2% probability) suggest that USD/JPY should remain within a defined 155.00–160.00 range unless risk-averse sentiment intensifies.

The Bank of Japan is unlikely to accelerate rate hikes, with only a 2% chance of a 25 basis points increase to 1.50% on October 30, and an 80% probability of a hike on December 18. This leaves USD/JPY likely to trade within the 155.00–160.00 range in the near term.