Yen Surges to Two‑Month Peak After PM Victory, Dollar Weakens on China Treasury Advisory

The Japanese yen rebounded sharply on Monday, snapping a six‑day losing streak and reaching its strongest level since February. The rally followed the election triumph of Prime Minister Sanae Takaichi, who led her coalition to a historic win. The currency slipped slightly after the announcement on Sunday, falling to a two‑week low, but recovered as the session progressed, closing at 155.88 JPY per dollar – a 0.84% decline.

"Japan’s political outcome is a clear driver behind the dollar’s retreat," said Eugene Epstein, head of structuring for North America at Moneycorp. "The yen’s movement has increasingly influenced other markets and asset classes.

Japan’s chief currency diplomat, Atsushi Mimura, warned that the government is monitoring the market with heightened urgency following Takaichi’s victory.

The yen also regained ground against other currencies, having previously hit record lows against the Swiss franc and hovered near its weakest level against the euro since the currency’s inception.

Goldman Sachs’ Stuart Jenkins noted that the election result has been priced into higher fiscal spending expectations, with Japanese government bond yields climbing and domestic equities giving an initial boost. He added that USD/JPY, which had been positively correlated with predictions of an LDP majority, has moved lower after the outcome.

On the dollar side, a new factor has emerged: Chinese regulators have urged banks to reduce their exposure to U.S. Treasury bonds. This guidance pushed the onshore yuan to a 33‑month high against the dollar and pulled the dollar down 0.24% to 6.922 versus the offshore yuan – the weakest level since May 2023.

Market participants are also weighing the possibility of Federal Reserve policy easing later this year. Fed funds futures priced in a 17.8% probability of a 25‑basis‑point cut at the next two‑day meeting on March 18, according to the CME Group’s FedWatch tool.

The U.S. dollar index fell 0.79% to 96.86, setting the stage for a week of key U.S. data releases, including retail sales, inflation and a delayed jobs report.

"The main narrative remains the unwinding of the Warsh trade," Epstein added. "The dollar had been weakening before the nomination, but the market was surprised by the perceived hawkish tone of the Warsh appointment.

The euro finished the day up 0.83% against the dollar at $1.1914, its highest level since January.