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The U.S. dollar weakened on Tuesday as investors braced for a heavy slate of economic data that will influence expectations for the Federal Reserve’s interest rate path. Currency markets remained cautious ahead of upcoming U.S. jobs and inflation reports, while the Japanese yen held onto recent gains following the decisive election victory of Japan’s Prime Minister Sanae Takaichi.
Sterling was steady during early Asian trading after a volatile start to the week, as markets weighed political uncertainty surrounding UK Prime Minister Keir Starmer alongside rising bets on further Bank of England rate cuts. The British pound last traded at $1.3682, holding near the previous session’s 0.6% gain.
The Japanese yen was quoted at 155.85 per U.S. dollar, maintaining strength after firming nearly 0.8% overnight. Verbal intervention from Japanese authorities helped support the yen after it initially weakened in response to Takaichi’s election win. However, analysts remain cautious about the yen’s longer-term outlook, noting that attention will soon shift to the new administration’s fiscal stance. Since Takaichi assumed leadership of the ruling LDP in October, the yen has fallen roughly 6%.
Market strategists expect looser fiscal policy under a more assertive government, which could eventually push the dollar-yen pair higher. Some forecasts see USD/JPY rising toward 164 by the end of the year. Meanwhile, the yen showed renewed weakness against the euro and Swiss franc, suggesting that recent gains may be fragile without stronger policy support from the Bank of Japan.
The euro eased slightly to $1.19 after a sharp rally in the previous session, while the U.S. dollar index hovered near a one-week low at 96.952. Reports that China has encouraged domestic banks to diversify away from U.S. Treasuries added to downward pressure on the dollar.
Investor focus now turns to delayed U.S. economic releases, including nonfarm payrolls and consumer price inflation. January payrolls are expected to show job growth of around 70,000, reinforcing expectations that the Fed could begin cutting interest rates as early as June. Elsewhere, the Australian and New Zealand dollars edged lower, tracking broader dollar weakness amid cautious market sentiment.
